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Debra K. Davenport
Auditor General
Performance Audit
Department of
Health Services
Division of Licensing Services—
Healthcare and Child Care Facility
Licensing Fees
Performance Audit Division
January • 2009
REPORT NO. 09-01
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Audit Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
Representative John Nelson, Chair Senator Robert Blendu, Vice Chair
Representative Tom Boone Senator Carolyn Allen
Representative Jack Brown Senator Pamela Gorman
Representative Peter Rios Senator Richard Miranda
Representative Steve Yarbrough Senator Rebecca Rios
Representative Jim Weiers (ex-officio) Senator Tim Bee (ex-officio)
Melanie M. Chesney, Director
Shan Hays, Manager and Contact Person
Jeremy Weber, Team Leader
Steven Meyeroff
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
January 7, 2009
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Ms. January Contreras, Acting Director
Department of Health Services
Transmitted herewith is a report of the Auditor General, a Performance Audit of the
Department of Health Services, Division of Licensing Services—Healthcare and Child Care
Facility Licensing Fees. This report is in response to an October 5, 2006, resolution of the
Joint Legislative Audit Committee. The performance audit was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes §41-2951 et seq. I am also
transmitting with this report a copy of the Report Highlights for this audit to provide a quick
summary for your convenience.
As outlined in its response, the Department of Health Services agrees with the finding and
plans to implement all of the recommendations directed to it.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on January 8, 2009.
Sincerely,
Debbie Davenport
Auditor General
Attachment
The Office of the Auditor General has conducted a performance audit of the
Department of Health Services (Department), Division of Licensing Services
(Division)—Healthcare and Child Care Facility Licensing Fees, pursuant to an
October 5, 2006, resolution of the Joint Legislative Audit Committee. This is the first
in a series of three reports on the Department and was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et
seq. This report focuses on licensing fees for healthcare and child care facilities. The
other two reports will focus on the Department’s substance abuse treatment
programs and the 12 statutory sunset factors.
As of October 1, 2008, the Department licensed 4,476 healthcare facilities (such as
hospitals, nursing homes, and assisted living centers) and 2,740 child care facilities
(child care centers and group homes). In fiscal year 2008, the Department conducted
15,110 inspections of these facilities and handled more than 3,300 complaints
against them. These regulatory activities cost about $10.9 million in General Fund
monies. Like other states, Arizona charges fees for state licensure. Most of these fees
are set or capped in statute and deposited into the General Fund, partially offsetting
regulatory costs. In fiscal year 2008, the Division collected less than $1.1 million in
licensing-fee revenue for these facilities.
Licensing fees could be modified to cover more
regulatory costs (see pages 9 through 21)
As of fiscal year 2008, the General Fund subsidized about 90 percent of the State’s
cost of regulating healthcare and child care facilities. Licensing fees, which cover the
remaining 10 percent, have remained largely unchanged since the 1970s and 1980s.
Although the Legislature authorized the Department to increase licensing fees to
generate an additional $600,000 in fee revenue in fiscal year 2009, even after this
increase, the General Fund will still subsidize about 85 percent of regulatory costs.1
Further, the regulatory workload has increased significantly—the number of licensed
facilities alone has increased by 19 percent between fiscal years 2003 and 2008—
and this increased workload will likely further increase the need for General Fund
monies.
1 The increased revenue will not increase the Department’s overall funding because the General Fund appropriation for
licensing was reduced by $600,000 for fiscal year 2009.
Office of the Auditor General
SUMMARY
page i
Rather than paying for regulatory costs from the General Fund, some states and
some other Arizona regulatory programs set their licensing fees to cover regulatory
costs. Arizona’s licensing fees for healthcare and child care facilities are considerably
lower than those in two states that have set healthcare licensing fees to fully cover
regulatory costs. For example, California and Nevada, which both charge hospitals
a licensing fee that covers the full regulatory cost, have licensing fees of $25,776 and
$8,000, respectively, for a 100-bed hospital, while Arizona’s fee for a hospital of the
same size is $2,850. In Arizona, licensing fees fully fund regulatory activities for such
professions as allopathic physicians, and within the Department itself, licensing fees
fully fund regulation of environmental laboratories and hearing and speech
professionals.
Although the Department does not have the authority to raise licensing fees for
healthcare and child care facilities, it is the logical place to start in developing a
proposal for possible fee increases. Licensing fees for these facilities are set in
statute, and therefore, the Legislature would need to approve any fee changes.
However, the Department is in the position to determine regulatory costs, and
therefore to develop a fee proposal that could reduce or eliminate the General Fund
subsidy. The Department should develop and implement a systematic approach to
regularly evaluate its licensing costs and propose new fees that would cover more, if
not all, of its costs. As part of this approach, the Department should consider factors
that affect costs, including licensed capacity, the time it takes to regulate different
types of facilities, and a facility’s compliance with requirements. The Department
should also assess the efficiency of its operations to ensure costs are as low as
possible, assess the adequacy of its information systems for measuring its costs,
and obtain input from the regulated facilities regarding proposed licensing fees.
Finally, the Department should develop a proposal for legislative consideration. After
receiving the Department’s proposal, the Legislature should consider modifying
licensing fees through revising the statutory caps, authorizing the Department to set
fees in rule, or establishing a mechanism in statute for determining fees.
State of Arizona
page ii
Office of the Auditor General
TABLE OF CONTENTS
continued
page iii
Introduction & Background 1
Finding 1: Licensing fees could be modified to cover more
regulatory costs 9
General Fund subsidizes cost of licensing and monitoring healthcare and
child care facilities 9
Arizona’s licensing fees outdated and not based on relevant cost factors 13
Some states go further than Arizona in basing fees on costs 14
Department should propose raising licensing fees to cover more of
regulatory costs 17
Recommendations 21
Appendix A a-i
Appendix B b-i
Agency Response
TABLE OF CONTENTS
concluded
page iv
State of Arizona
Agency Response
Tables:
1 Licensing Programs, Descriptions, and Number of Licensees
As of October 1, 2008 3
2 Licensing Fee Descriptions, Fee Amounts, and Authorizing Statutes
As of October 1, 2008 5
3 Division’s Schedule of Revenues, Expenditures, and
Other Financing Sources and Uses
Fiscal Years 2006 through 2008
(Unaudited) 6
4 General Fund Costs and Licensing Fee Revenues by Program
Fiscal Year 2008
(Unaudited) 15
5 Comparison of Renewal Licensing Fees in Arizona and
Eight Western States for Various Facility Types at
Specified Capacity Levels
Fiscal Year 2009 16
6 Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009 a-i
Figures:
1 Comparison of General Fund Costs and Licensing Fee Revenues
Fiscal Years 2006 through 2008
(Unaudited) 11
2 Mississippi Joint Legislative Committee on
Performance Evaluation and Expenditure Review
Structured Fee-Setting Process Developed for State Government 19
The Office of the Auditor General has conducted a performance audit of the
Department of Health Services (Department), Division of Licensing Services
(Division)—Healthcare and Child Care Facility Licensing Fees, pursuant to an
October 5, 2006, resolution of the Joint Legislative Audit Committee. This is the first
in a series of three reports on the Department and was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et
seq. This report focuses on licensing fees for healthcare and child care facilities. The
other two reports will focus on the Department’s substance abuse treatment
programs and the 12 statutory sunset factors.
Department licenses healthcare and child care facilities
The Department is responsible for protecting the health and safety of Arizonans in
healthcare and child care facilities by establishing and enforcing rules for the
licensure and regulation of these facilities. The Department also contracts with the
federal Centers for Medicare and Medicaid Services (CMS) and the Arizona Health
Care Cost Containment System (AHCCCS), the State’s Medicaid program, to
regulate healthcare facilities that participate in Medicare or Medicaid programs.
The Department performs these regulatory functions through its Division of Licensing
Services. As of October 1, 2008, the Division licensed 4,476 healthcare facilities
(such as hospitals, nursing homes, and assisted living centers) and 2,740 child care
facilities (child care centers and group homes). Regulatory activities include:
 Issuing licenses—The Division issues initial and renewal licenses to qualified
applicants. Licenses for healthcare facilities are valid for 1 year, while licenses for
child care facilities are valid for 3 years. The Division also issues 3-year licenses
to hospitals accredited by a nationally recognized accrediting organization.
Further, the Division issues provisional, change of ownership, and amended
licenses as needed. In fiscal year 2008, the Division issued 3,759 initial, renewal,
and other licenses to healthcare facilities and 717 licenses to child care facilities.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
 Conducting compliance surveys—The Division conducts on-site inspections,
called surveys, to determine if licensed facilities comply with applicable rules.
For most facilities, the Division conducts a survey for each initial or renewal
license issued to a facility. It does not generally conduct surveys for accredited
healthcare facilities, but may do so if the accreditation does not cover the entire
3-year license. If the Division finds that a facility is not in full compliance, it
prepares a statement of deficiencies report, requires the facility to develop and
implement a plan of correction, and conducts follow-up and other monitoring
surveys as needed. In addition, the Division conducts additional surveys for
changes that affect a license, such as changes in ownership or the number of
licensed beds, and conducts annual inspections of child care facilities. In fiscal
year 2008, the Division conducted approximately 4,209 initial and renewal
license surveys and 10,901 follow-up and other monitoring surveys for
healthcare and child care facilities.
 Handling complaints—The Division receives complaints and investigates
specific allegations of noncompliance with laws or rules against licensed
facilities. In fiscal year 2008, the Division received 2,119 complaints for
healthcare facilities and 1,182 complaints for child care facilities.
 Enforcing compliance—The Department takes enforcement actions against
facilities that are in noncompliance with applicable rules. Most enforcement
actions are civil penalty agreements, but other actions can include denying a
license application, suspending or revoking a license or certificate, and
obtaining a court-ordered injunction that prohibits a facility from continuing a
specific act that violates rules. In fiscal year 2008, the Division imposed 349 civil
penalty agreements and collected $512,565 in penalties against healthcare and
child care facilities, which are deposited in the General Fund. It also denied
seven license applications.
 Educating consumers—The Division provides the public with information on its
Web site regarding licensed facilities, survey results, enforcement actions, and
how to select appropriate care facilities.
In addition to regulating healthcare and child care facilities, the Division also licenses
hearing aid dispensers, audiologists, speech and language pathologists, nonnurse
midwives, and group homes for people with developmental disabilities. As of
October 1, 2008, the Division licensed 3,310 individual professionals and 975 group
homes for people with developmental disabilities. The Division also reviews
architectural plans for construction projects related to licensed facilities and provides
technical assistance. As shown in Table 1 (see page 3), the Division carries out its
various duties through six licensing programs.
State of Arizona
page 2
Survey—On-site inspection
of a facility, conducted by a
team of one or more
surveyors led by a survey
team leader, to determine
compliance with laws and
rules.
Licensing fees
Like other states, Arizona charges fees for state licensure.1 Most of these fees are set
or capped in statute and deposited into the General Fund, partially offsetting the cost
of licensure. Fees for licensing hearing and speech professionals, however, are set
in administrative rule, deposited into the Hearing and Speech Professionals Fund,
and cover the cost of licensing these individuals. Licensed facilities and individuals
Most license fees are
set or capped in statute.
1 The Department does not charge fees for licensing group homes for people with developmental disabilities.
Office of the Auditor General
page 3
Licensing Program Description
Number of
Licensees1
Healthcare Facility Programs
Assisted living licensing Licenses assisted living homes and
centers, adult foster care homes, and
adult day healthcare facilities. 1,930
Long-term care licensing Licenses nursing care institutions and
Intermediate Care Facilities for the
Mentally Retarded (ICFs/MR). 150
Medical facilities licensing Licenses medical facilities, including
hospitals, home health agencies,
hospices, and ambulatory surgical
and outpatient treatment centers.
1,577
Behavioral health licensing Licenses behavioral health facilities,
including inpatient, residential, and
outpatient facilities, and adult
therapeutic homes. 819
Child Care Facility Licensing Program
Child care licensing Licenses and certifies child care
centers and group homes. 2,740
Other Licensing Programs
Special licensing Licenses hearing aid dispensers,
audiologists, speech and language
pathologists, nonnurse midwives, and
group homes for people with
developmental disabilities. Also
performs other licensing-related
duties such as architectural reviews
of healthcare and child care facilities. 4,285
Table 1: Licensing Programs, Descriptions, and Number of Licensees
As of October 1, 2008
1 The numbers include only licensees with active licenses.
Source: Auditor General staff analysis of licensing information from the Division’s Web site, the Arizona
Department of Health Services 2006-2007 Annual Report, and data on the number of licensees
provided by division staff.
pay the applicable fee(s) each time they submit an application for an initial or renewal
license. As shown in Table 2 (see page 5), fees for healthcare facilities vary based on
licensed bed capacity.
Budget and staffing
The Division receives both state and federal funding. State funding consists primarily
of General Fund appropriations. Although most licensing fees are deposited into the
General Fund, fees deposited into the Hearing and Speech Professionals Fund are
appropriated to the Division for regulating hearing and speech professionals.1 The
Division also receives federal Title XVIII and Title XIX monies from CMS and AHCCCS
for Medicare and Medicaid certification. In addition, it receives federal Child Care and
Development Fund and Maternal and Child Health Services grant monies from the
U.S. Department of Health and Human Services to help pay for the cost of regulating
child care facilities and nonnurse midwives, respectively. Table 3 (see page 6) shows
the Division’s revenues and expenditures for fiscal years 2006 through 2008. The
Division’s largest expenditures are for salaries and employee-related expenses.
The Division is led by an assistant director who reports to the Department’s director.
Division staff also include a deputy assistant director, program managers, surveyors,
survey team leaders, administrative and support staff, and architects. As of
November 2008, the Division had 254.58 full-time equivalent positions, of which 31
were vacant.
Scope and objectives
This performance audit focused on determining the extent to which licensing fees for
healthcare and child care facilities cover the regulatory costs. This report has one
finding:
 Licensing fees for healthcare and child care facilities could be modified to cover
more of the State's regulatory costs. The Department should develop a cost-based
method for calculating fees, including direct and indirect licensing and
monitoring costs, and propose new fees to the Legislature based on this
method. The Legislature should consider modifying licensing fees through
revising the statutory caps, authorizing the Department to set fees in rule, or
establishing a mechanism in statute for determining fees.
This audit was conducted in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings
1 Laws 2008, Chapter 291, §12, authorizes the Department to generate an additional $600,000 in licensing-fee revenue in
fiscal year 2009 (see Finding 1, pages 9 through 21). The law appropriates the $600,000 directly to the Department.
State of Arizona
page 4
Office of the Auditor General
page 5
Fee (license period) Fee Amount
Statute
Establishing Fee
Healthcare Facilities (1 year, 3 years for accredited hospitals)
Assisted living, long-term care, medical (including hospitals), and behavioral health facilities
Application fee $ 50 A.R.S. §36-405
License fee 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100 base fee
$100 base fee
$200 base fee
$300 base fee
$500 base fee
plus $25/bed1
plus $25/bed1
plus $25/bed1
plus $25/bed1
Child Care Facilities (3 years)
Child care centers
Application fee $150 A.R.S. §36-882
Late filing fee 50
Child care group homes
Application fee $30 A.R.S. §36-897.01
Late filing fee 25
Other Licensing Programs
Hearing aid dispensers (1 year)2
License fee $350 ($250 application fee, $100 license fee) A.R.S. §36-1908
Reciprocity license 200 ($100 application fee, $100 license fee)
Organization license 200 ($100 application fee, $100 license fee)
Temporary license 200 ($100 application fee, $100 license fee)
Renewal license 100
Late filing fee 25
Duplicate license fee 25
Audiologists and speech-language pathologists (1 year)2
Application fee $200 ($100 application fee, $100 license fee) A.R.S. §36-1908
Renewal fee 100
Late filing fee 25
Duplicate license fee 25
Nonnurse midwives (2 years)
Application fee $25 A.R.S. §36-758
Initial licensing fee3 25
Renewal fee3 25
Testing fee3 100
Duplicate license fee 10
Architectural drawing review
Fee Project cost:
$0-$99,999
100,000-499,999
500,000 and over
$50
100
150
A.R.S. §36-405
Table 2: Licensing Fee Descriptions, Fee Amounts, and Authorizing Statutes
As of October 1, 2008
1 Although statute establishes a $10 bed fee, the Department increased the bed fee to $25 in September 2008 in
response to Laws 2008, Chapter 291, §12, which authorized the Department to increase fees.
2 Fees for these licensees are authorized in statute, but the fee amounts are set by the Department in the Arizona
Administrative Code.
3 A.R.S. §36-758 authorizes the Department to charge up to $50 for a license and up to $250 for testing.
Source: Auditor General staff analysis of applicable Arizona Revised Statutes, Arizona Administrative Code, and session
laws.
State of Arizona
page 6
2006 2007 2008
Revenues:
State General Fund appropriations $ 7,793,273 $ 9,468,913 $ 9,841,641
Federal grants and contracts 5,577,109 4,964,529 5,959,894
Licensing fees 1,347,391 1,484,052 1,443,467
Fines, forfeits, and penalties 614,661 688,808 802,581
Other 35,104 12,647 17,074
Total revenues 15,367,538 16,618,949 18,064,657
Expenditures:1
Personal services and related benefits 11,110,201 13,035,897 14,037,597
Professional and outside services 116,690 38,995 52,152
Travel 418,209 431,114 400,651
Aid to organizations 122,307 176,907 362,999
Other operating 471,517 532,019 530,642
Equipment 121,790 224,943 81,905
Total expenditures 12,360,714 14,439,875 15,465,946
Excess of revenues over expenditures 3,006,824 2,179,074 2,598,711
Other financing sources (uses):
Remittances to the State General Fund2 (1,525,168) (1,633,142) (1,598,618)
Net operating transfers in (out) (883,783) (546,622) (1,671,959)
Total other financing sources (uses) (2,408,951) (2,179,764) (3,270,577)
Excess (deficiency) of revenues and other sources
over expenditures and other uses $ 597,873 $ (690)3 $ (671,866)3
Table 3: Division’s Schedule of Revenues, Expenditures, and
Other Financing Sources and Uses
Fiscal Years 2006 through 2008
(Unaudited)
1 Administrative adjustments are included in the fiscal year paid.
2 As required by A.R.S. §35-146 all licensing fees; fines, forfeits, and penalties; and other revenues collected by the
Division, except those deposited into the Hearing and Speech Professionals Fund and the Nursing Care Revolving
Fund, are remitted to the State General Fund.
3 According to the Division, the deficiencies in 2007 and 2008 resulted primarily from timing differences between
receipt of revenues and the use of those monies. The deficiencies were funded from unexpected prior years'
revenues.
Source: Auditor General staff analysis of the Arizona Financial Information System Accounting Event Transaction File
for fiscal years 2006 through 2008.
and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
The Auditor General and staff express appreciation to the Acting Director of the
Department of Health Services and her staff for their cooperation and assistance
throughout the audit.
Office of the Auditor General
page 7
State of Arizona
page 8
Licensing fees could be modified to cover more
regulatory costs
The licensing fees charged to healthcare and child care facilities cover only a small
part of the State’s costs of regulating the facilities and could potentially be changed
to cover more of these costs. As of fiscal year 2008, the General Fund subsidized
about 90 percent of the State’s cost to license and monitor these facilities. The fees
that cover the remaining 10 percent have been largely unchanged since the 1970s
and 1980s, and are not adequately based on relevant cost factors. Arizona’s fees are
considerably lower than those in two states that have set fees to fully recover
regulatory costs. Although decisions about the fees rest ultimately with the
Legislature, the Department of Health Services (Department) should take steps to
develop and propose fees that would more fully and accurately recoup regulatory
costs. These steps include adopting a systematic method for periodically measuring
costs, ensuring that information systems can collect the necessary data for
determining costs, and proposing appropriate fees, including obtaining input from
regulated facilities.
General Fund subsidizes cost of licensing and monitoring
healthcare and child care facilities
The General Fund subsidizes the majority of the State’s costs for licensing and
monitoring healthcare and child care facilities. Licensing-fee revenue, which helps
offset these costs, covers only a small portion of what the State spends. The portion
covered by fees has been made even smaller by the Department’s inability to issue
some licenses within statutory time frames because the Department must refund the
fee if it does not issue a license on time. Although legislation passed in 2008 will
increase fee revenue and may improve the Department’s efficiency in processing
renewal license applications, the State will likely continue to subsidize a large portion
Office of the Auditor General
page 9
FINDING 1
of licensing costs. In addition, growth in the Department’s workload and the
complexity of the licensed industries will likely create a need for additional General
Fund monies in the future.
State’s costs exceed licensing-fee revenue—In fiscal year 2008, the State
spent over $10.9 million in General Fund monies to regulate healthcare and child
care facilities but collected less than $1.1 million in fee revenue. This is less than
10 percent of the total amount spent. Arizona uses the General Fund to pay the
majority of the State’s costs for licensing and monitoring healthcare and child care
facilities.1 Although licensing fees collected from these facilities are deposited into
the General Fund and help defray the State’s costs, most of the General Fund
money spent to regulate the facilities comes from general taxes and other
revenues.
The subsidy has increased in recent years. Figure 1 (see page 11) shows how the
total cost of licensing and monitoring these facilities compares with licensing-fee
revenue for fiscal years 2006 through 2008. As shown in the figure, costs have
increased by more than $2.5 million over the past 3 years, while fee revenue has
remained relatively flat. As a result, the percentage of total costs recouped by fee
revenue has dropped from approximately 12.1 percent in fiscal year 2006 to 9.7
percent in fiscal year 2008.
Moreover, fee revenue that the Department is required to refund when it does not
issue licenses within established time frames increases the state subsidy. Arizona
Revised Statutes (A.R.S.) §41-1077 requires state agencies to refund licensing
fees if license applications are not processed within established time frames. For
example, in fiscal year 2008, the State actually received almost $1.4 million in fee
revenue, but refunded over $297,000 (approximately 22 percent) because of
missed time frames. Most of the refunds were for assisted living and long-term
care facilities.
Recent legislative changes will have limited effect on subsidy—The
Legislature took two separate actions in 2008 that will increase fee revenues, but
these changes are not likely to have much impact on reducing the General Fund
subsidy. Specifically:
 Laws 2008, Chapter 291, §12, authorized the Department to increase any of
its fees to generate $600,000 in additional revenue during fiscal year 2009.2
The Department decided to raise licensing fees for healthcare facilities with
inpatient beds, such as hospitals, nursing homes, and assisted living centers,
by increasing the per-bed portion of the fee to $25 from the previous amount
of $10. The fee increase went into effect for all licenses that expired on or after
In fiscal year 2008, the
State collected fees
equal to less than 10
percent of the total
amount spent to
regulate healthcare and
child care facilities.
2008 legislation
authorized the
Department to increase
fees by a total of
$600,000 in fiscal year
2009.
1 General Fund monies also pay for the cost of state matching requirements for federal Title XIX funding the Department
receives for performing Medicaid certification duties related to healthcare facilities. The State matches $1 for every $1 of
Title XIX monies received for assisted living and behavioral health programs, and $1 for every $3 of Title XIX monies
received for the long-term care program.
2 The increased revenue will not increase the Department’s overall revenues because the General Fund appropriation for
licensing was reduced by $600,000 for fiscal year 2009.
State of Arizona
page 10
September 30, 2008. However, the fee increase will have limited impact on
total revenue. Although department officials believe the fee increase will
generate the full $600,000 in additional revenue authorized by the law, the
amount is less than 6 percent of the total General Fund cost of regulating
healthcare and child care facilities in fiscal year 2008. Moreover, the fee
increase does not affect facilities that do not have inpatient beds, such as
outpatient treatment centers. As of October 2008, almost 43 percent of state-licensed
healthcare facilities had no inpatient beds.
 Laws 2008, Chapter 66, allows the Department to conduct the on-site
compliance survey for healthcare and child care facility renewal licenses at
any time during the license period, instead of having to conduct the survey
before issuing the license. Division of Licensing Services (Division)
management believes this change will help licensing staff schedule their work
Office of the Auditor General
page 11
$0
$2
$4
$6
$8
$10
$12
2006 2007 2008
Dollars
(In Millions)
Costs Licensing-Fee Revenues
Figure 1: Comparison of General Fund Costs1 and Licensing Fee Revenues
Fiscal Years 2006 through 2008
(Unaudited)
1 Amounts include indirect costs incurred by the Division and the Department for regulating healthcare
and child care facilities. Amounts also include General Fund monies used for state matching
requirements for Title XIX funding for Medicaid certification. The state matching portion of the costs
was approximately $1 million in fiscal year 2006, $1.2 million in fiscal year 2007, and $1.3 million in
fiscal year 2008.
Source: Auditor General staff analysis of data from the Arizona Financial Information System
Accounting Event Transaction File and the Department’s cost-allocation rates for indirect and
data-processing costs for fiscal years 2006 through 2008.
more efficiently, particularly for surveys that require travel, and issue renewal
licenses within established time frames, thereby reducing refunds. However,
even a complete elimination of refunds would have a limited impact on the
General Fund subsidy. The $297,000 refunded in fiscal year 2008 is less than
3 percent of the General Fund cost of regulating healthcare and child care
facilities in that year.
Increased workload will likely affect need for General Fund monies—
Even with these legislative changes, growth in the volume and complexity of work
the Division performs will likely increase the need for General Fund monies. The
Division’s workload grew significantly between fiscal years 2003 and 2008.
According to division data, the average number of healthcare and child care
facilities with active licenses increased over 19 percent between fiscal years 2003
and 2008, from 5,857 to 6,978 facilities. Most of this growth occurred in the
assisted living, medical facilities, and child care programs. In addition, the number
of hospitals that do not have accreditation and thus require an annual compliance
survey for licensure has grown from 11 out of 76 hospitals in 2000 to 30 out of 89
hospitals in 2008.
Besides the growth in number of facilities, surveys have become more complex
and enforcement actions have increased. According to division management,
licensed healthcare facilities are providing more complex and sophisticated
patient care than ever before. Management believes that this increase in the
complexity of patient care and other factors have led to lengthier, more complex
surveys and complaint investigations, and increased enforcement actions. These
factors include nursing and child care staff shortages in the healthcare and child
care industries, an increase in lawsuits that rely on the results of complaint
investigations, and greater public awareness of the Division’s regulatory role.
Division management also reported that a slight increase in the number of
complaints against unlicensed facilities and an increase in the number of private
doctors who are joining their practices with medical facilities are also increasing
the Division’s workload. Overall, division data shows that the number of
enforcement actions against healthcare and child care facilities combined
increased 158 percent over the past 5 years, from 212 actions in fiscal year 2003
to 547 actions in fiscal year 2008. The assisted living, long-term care, and child
care programs had the greatest increase in the number of actions. Enforcement
actions can require significant amounts of staff time.
Department and division management believe these trends have and will continue
to increase the need for additional General Fund monies. State financial data
shows that the Division’s General Fund appropriations increased nearly 43 percent
since fiscal year 2003, from over $6.5 million that year to over $9.3 million in fiscal
year 2009.
State of Arizona
page 12
The average number of
licensed facilities
increased over 19
percent between fiscal
years 2003 and 2008.
Arizona’s licensing fees outdated and not based on
relevant cost factors
Arizona’s licensing fees for healthcare and child care facilities had not been updated
for many years until some fees were increased in September 2008, and as discussed
previously, this increase will not substantially change the subsidy. In addition,
Arizona’s fees are not adequately based on factors that affect cost.
Licensing fees have not changed in several years—Arizona has not
updated its licensing fees for child care facilities in at least 20 years, and its fees
for healthcare facilities had not changed for nearly that long until the legislative
change that took effect in September 2008. The licensing
fee for child care centers was last updated in 1976 when it
increased from $25 to $50 per year. The fee for child care
group homes has remained $30 for a 3-year certificate since
it was established in 1988.1 Until the bed fee increased in
September 2008, licensing fees for healthcare facilities had
not changed since they were established in 1989. However,
although the bed fee has increased from $10 to $25 per
bed, the base and application fees have not changed.
Consequently, the fee increase does not affect the 43
percent of facilities without licensed beds, such as
outpatient treatment centers.
According to division management, the Department has
had internal discussions about proposing fee increases in
the past, but these discussions have never led to a
legislative proposal because of concerns that there would
be a lack of support.
Licensing fees not based on costs—The State’s licensing fees for healthcare
and child care facilities are not adequately based on factors that can affect the
costs of regulating a particular facility. Some factors that can affect costs include:
 Licensed capacity—The Division’s costs may vary depending on licensed
capacity. For example, the survey for a child care center with a licensed
capacity of several hundred spaces may take longer than the survey for a
center with a licensed capacity of 20 spaces. Although Arizona’s fees for
healthcare facilities vary based on capacity, fees for child care facilities do not.
Consequently, a child care center with several hundred licensed spaces pays
the same fee as a center with 20 licensed spaces.
 Type of facility—Regulatory costs may also vary depending on the type of
facility and the applicable rules and regulations. Some facilities require more
time to regulate than others. For example, according to division data, a
The Division’s regulatory
costs may vary
depending on the facility
type.
1 Although the licensing fees have not changed, in 1992 the Legislature added a late application fee of $50 for child care
centers and $25 for child care group homes.
Office of the Auditor General
page 13
Year in which Arizona’s licensing fees
for child care and healthcare facilities
were last modified
Facility Type Year
Child Care Facilities
Child Care Centers 1976
Child Care Group Homes 1988
Healthcare Facilities
Application Fee 1989
Base Fee 1989
Bed Fee 2008
Sources: Auditor General staff analysis of Arizona Revised Statutes
and session laws.
renewal survey for state licensure of an assisted living center, which has a
typical licensed capacity of 70 beds, can take approximately 21 person-hours,
while the survey for a home health agency, which has no licensed capacity,
can take 33 person-hours. Consequently, capacity may not fully account for
differences in survey times resulting from differences in facility types. Although
Arizona charges different fees for different types of child care facilities,
healthcare facilities with the same capacity pay the same fee regardless of
facility type.
In addition, A.R.S. §§36-885 and 36-897.05 require the Division to conduct
annual inspections of child care facilities, but these facilities have 3-year
licenses. Thus, regulatory costs are incurred annually, while revenue is only
collected every 3 years.
 Facilities’ compliance with requirements—The Division’s costs may also vary
depending on a facility’s compliance with rules and regulations.
Noncompliance can result in follow-up inspections, complaint investigations,
and enforcement actions, which increase the cost of regulating facilities. In
Arizona, facilities that require follow-up inspections and complaint
investigations do not pay more for their licenses than facilities that comply with
requirements.
Because fees do not account for all of the factors that may affect costs, the
General Fund subsidizes some licensing programs more than others. As seen in
Table 4 (see page 15), although none of the Division’s healthcare and child care
licensing programs’ revenues cover the programs’ costs, some programs’
revenues covered more costs than others’. Further, the average costs to regulate
facilities vary by program. Thus, although all of the programs were subsidized, fees
that do not account for differences in costs might be inequitable.
Some states go further than Arizona in basing fees on
costs
To provide points of comparison with Arizona’s fees and practices, auditors
contacted eight Western states.1 Nearly all of these states go beyond Arizona in
taking facility type and capacity into account in their fee structures, and some go
beyond Arizona in attempting to recover regulatory costs.
Other states’ fees take relevant cost factors more into account—
Compared with Arizona’s fee structure, fees in the eight other states generally had
greater differentiation based on the type and size of facilities. Specifically:
Arizona’s healthcare
and child care facility
licensing fees are not
adequately based on
relevant cost factors.
1 The eight states—California, Colorado, Nevada, New Mexico, Oregon, Texas, Utah, and Washington—were selected
based on their geographic and demographic similarity to Arizona.
State of Arizona
page 14
 Licensed capacity—In Arizona, fees for child care facilities do not vary by
capacity. Seven of the eight comparison states charge renewal licensing fees
for child care centers that vary based on capacity.
 Type of facility—Although Arizona’s fees for healthcare facilities do not vary by
facility type, fees in all eight comparison states often do. (see Table 6 in
Appendix A, pages a-i through a-v). Two of these states, California and
Nevada, set fees for different healthcare facility types based on the time it
takes to regulate them.
 Facilities’ compliance with requirements—Two of the states that auditors
reviewed—Washington and California—have additional fees for non-compliance.
Specifically, Washington has established fees for on-site surveys
resulting from substantiated complaints and other follow-up surveys for some
of its healthcare facilities. Additionally, for assisted living and child care
facilities, California has established probation-monitoring fees for facilities that
are on probation and plan-of-correction fees for facilities that fail to implement
corrective plans by a specified date.
Some states have set fees to cover full regulatory costs—Arizona’s
licensing fees are considerably lower than those in two states that set their fees to
fully recover regulatory costs. Table 5 (see page 16) compares Arizona’s fees with
eight other states’ fees using example fees for seven types of facilities, including
hospitals, nursing homes, and child care centers.1 Auditors based the example
Arizona’s licensing fees
are much lower than
two Western states
where fees are set to
cover full regulatory
costs.
Office of the Auditor General
page 15
Assisted
Living
Program
Long-Term
Care
Program
Medical
Facilities
Program
Behavioral
Health
Program
Child
Care
Program Total
Number of facilities1 2,044 152 1,618 881 2,929 7,624
Costs $2,933,782 $1,303,751 $1,212,180 $1,469,562 $4,012,855 $10,932,130
Licensing fee revenue 431,593 80,820 221,310 178,550 150,565 1,062,838
Average costs per facility 1,435 8,577 749 1,668 1,370 1,434
Average revenue per facility 211 532 137 203 51 139
Revenue as a percentage of costs 14.7% 6.2% 18.3% 12.1% 3.8% 9.7%
Table 4: General Fund Costs and Licensing Fee Revenues by Program
Fiscal Year 2008
(Unaudited)
1 The number of facilities is based on the average number of facilities with active and pending licenses for the fiscal year. The numbers may
include a small number of facilities that do not pay licensing fees because they are exempted from doing so by statute or because they
are federally certified but not state licensed.
Source: Auditor General staff analysis of data from the Arizona Financial Information System Accounting Event Transaction File, the
Department’s cost-allocation rates for indirect and data-processing costs, and data on licensees from the Division’s performance
measures for fiscal year 2008.
1 See Table 6 in Appendix A (pages a-i through a-v) for a more complete comparison of renewal licensing fee schedules
across all nine states.
State of Arizona
page 16
Hospital
(100 beds)
Inpatient Hospice
(10 beds)
Psychiatric Hospital
(45 beds)
Nursing Home
(120 beds)
Home Health
Agency3
Assisted Living
Center
(70 beds)
Child Care Center
(100 spaces)
California $25,776 California $1,875 California $11,599 California $34,440 California $4,159 Nevada $7,622 California $800
Washington 11,300 Nevada 1,702 Nevada 6,350 Washington 33,000 Nevada 1,517 Washington 5,530 Washington 400
Nevada 8,000 Texas 875 Texas 4,510 Nevada 4,700 Washington 1,081 Arizona 2,000 Oregon 200
Oregon 2,900 Oregon 750 Washington 3,150 Arizona 3,350 Texas 875 Colorado 1,760 Utah 175
Arizona 2,850 Washington 721 Colorado 2,155 Utah 1,640 Utah 755 California 1,126 Colorado 160
Colorado 2,615 Arizona 400 Arizona 1,275 Texas 725 Oregon 600 Utah 900 Nevada 150
Texas 1,960 Colorado 360 Oregon 1,000 New Mexico 720 Arizona 150 Texas 450 Texas 135
Utah 1,700 Utah 320 Utah 875 Oregon 450 New Mexico 100 New Mexico 150 New Mexico 55
New Mexico 600 New Mexico 100 New Mexico 270 Colorado 360 Oregon 30 Arizona 50
Table 5: Comparison of Renewal Licensing Fees in Arizona and
Eight Western States for Various Facility Types at
Specified Capacity Levels1, 2
Fiscal Year 2009
1 The table compares renewal licensing fees for the following states: Arizona, California, Colorado, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. Auditors
selected at least one facility type from each of Arizona’s facility licensing programs. Auditors selected the bed capacities based on typical capacities for Arizona’s facilities.
See Table 6 in Appendix A for a comparison of the renewal fee schedules for all nine states.
2 The fees include all application, capacity, and other fees charged for renewal licenses in these states. In addition, auditors have adjusted the fees to account for
differences in licensure periods. The table compares the annual portion of each state’s fees.
3 Home health agencies have no bed capacity. In 2008, Colorado passed legislation to begin licensing home care agencies by June 2009.
Source: Auditor General staff analysis of data on licensed capacities for the selected facilities provided by the Division and information obtained from the selected states’
statutes, Web sites, administrative codes, and officials and staff in these states.
Office of the Auditor General
page 17
fees on typical licensed capacities for such facilities in Arizona. As the table shows,
compared to all eight states, Arizona’s licensing fees are relatively low for inpatient
hospices, psychiatric hospitals, home health agencies, and child care centers, but
at or above the middle fee for assisted living centers, nursing homes, and
hospitals.
Most notably, Arizona’s fees were often much lower than fees in three states—
California, Nevada, and Washington. Two of these states, California and Nevada,
have set fees for licensed healthcare facilities so that fee revenue covers the cost
of regulating them.1 For example, California passed legislation in 2006 that
requires the agency that regulates healthcare facilities to be entirely supported by
federal funding and fee revenue, unless General Fund monies are specifically
appropriated. Consequently, California has set fees to cover the cost of regulating
licensed healthcare facilities, such as hospitals and nursing homes. According to
a state official, California’s General Fund is not expected to subsidize any of the
estimated $91 million cost to regulate healthcare facilities in fiscal year 2009.
Nevada has also set fees to cover the costs of regulating healthcare facilities,
including hospitals, and does not rely on General Fund appropriations.
Department should propose raising licensing fees to
cover more of regulatory costs
Although the Department does not have the authority to raise licensing fees for
healthcare and child care facilities, it is the logical place to start in developing a
proposal for possible fee increases. Licensing fees for these facilities are set in
statute, and therefore, the Legislature would need to approve any fee changes.
However, the Department is in the position to determine regulatory costs, and
therefore to develop a fee proposal that could reduce or eliminate the General Fund
subsidy. Arizona relies entirely on fee revenue to cover costs for some other
regulatory activities. To propose fees that would more fully and accurately recoup
regulatory costs, however, the Department would need to adopt a systematic method
for periodically measuring costs, ensure that information systems
can collect the necessary data for determining costs, and obtain
input from regulated facilities. The Legislature could then
consider various options for implementing the proposal, if it so
chooses.
Raising fees to cover costs is an option—Using fees to
fully cover regulatory costs occurs in Arizona and other state
governments. For example, in Arizona, 90/10 boards, such as
the Arizona Medical Board, which regulates allopathic
physicians, are entirely funded by revenue derived from the
1 Another comparison state, Colorado, also passed legislation in 2007 to fund the regulation of its healthcare facilities solely
with fee revenue. Colorado has revised fees to cover the costs of regulating hospitals and psychiatric hospitals, but is still
in the process of revising fees for other facilities.
Arizona 90/10 Board—A board, usually a
regulatory board, that keeps 90 percent of
its revenue and remits 10 percent to the
General Fund. The revenue kept by the
board finances 100 percent of the board’s
regulatory costs.
Source: Auditor General staff analysis of information from the
Arizona Department of Administration’s General
Accounting Office Web site.
The Department should
seek to minimize costs
where possible.
1 Joint Legislative Committee on Performance Evaluation and Expenditure Review: State Agency Fees: FY 2001Collections
and Potential New Fee Revenues. Jackson, MI: Joint Legislative Committee on Performance Evaluation and Expenditure
Review, Dec. 2002.
2 According to PEER, the approach was based on a review of academic literature, economics theory, and policies and
procedures from various states and the United States and Canadian governments.
State of Arizona
page 18
regulated entities. Within the Department itself, licensing fees fully fund the Arizona
State Laboratory’s environmental laboratory licensure program as well as the
Division’s regulation of hearing and speech professionals. In addition, as
mentioned previously, some states, such as California and Nevada, use licensing-fee
revenue to pay for the cost of regulating some facilities, and Colorado is
currently moving toward doing so.
Department should evaluate fees and propose adjustments as
needed—The Department should develop or adopt a structured approach to
evaluate its licensing fees and propose new fees that would cover more, if not all,
of its costs. Mississippi’s Joint Legislative Committee on Performance Evaluation
and Expenditure Review (PEER) developed an approach for evaluating and setting
fees that the Department might find useful.1 PEER’s approach consists of a
decision model for establishing or increasing government fees, called the Theory
of Fee Setting in Government, as well as guidance on implementing new fees.2
Figure 2 (see page 19) summarizes key concepts from PEER’s approach.
As part of its approach, the Department should develop an appropriate method for
calculating fees based on direct and indirect costs for licensing and monitoring
healthcare and child care facilities. In doing so, the Department might want to
consider contacting other states, such as California and Nevada, to determine how
they calculate their fees and what effect raising fees to cover costs had on their
licensed facilities. In addition, the Department should do the following:
 Assess efficiency of operations—The Department should assess the
efficiency of its operations to ensure costs are as low as possible and
document the results of its assessment. The Department should seek to
minimize costs where possible.
 Develop fees based on relevant cost factors—To make fees more equitable,
the Department should consider charging fees based on licensed capacity
and the time it takes to regulate different facilities for both healthcare and child
care facilities. In addition, the Department should determine an appropriate
method for including the cost of follow-up inspections, complaint
investigations, and other monitoring activities that result from noncompliance
with licensing rules. For example, the Department could consider charging
separate fees for these activities.
 Assess adequacy of current information systems—The Department should
assess the adequacy of its current systems for tracking direct and indirect
cost data related to its licensing activities. It should also track time spent on
licensing and monitoring activities for all of its licensing programs. The
Department uses a federal information system to track time spent on activities
Arizona’s 90/10 boards
and some other
licensure programs
have fees that fully
cover regulatory costs.
Office of the Auditor General
page 19
Figure 2: Mississippi Joint Legislative Committee on
Performance Evaluation and Expenditure Review
Structured Fee-Setting Process Developed for State Government
Determine whether fees or taxes should fund the service
Who benefits from the service: individuals, the public, or both?
• Fees should be used to finance services that benefit individuals.
• Taxes should be used to finance services that benefit the public.
• When both individuals and the public benefit from a service, financing can come
from both fees and taxes.
Identify and analyze legal issues
• Are fees limited by statute?
• If so, is legislation required to change them?
• Should administrative rules be revised?
Identify the purpose of the fee
• Should the fee cover the cost of providing the service?
• Should fees be set to influence behavior?
• Should fees be set to encourage compliance with program regulations
and goals?
Assess factors influencing the fee amount
• What effect will the fee have on those who pay the fee?
• What effect will the fee have on annual revenue?
• What do similar states charge for the service?
• Will the public accept the necessity of the fee?
• Is the Department subsidizing other government operations?
Determine appropriate methodology for setting fees
• Determine if there is a comprehensive cost-accounting system.
• Seek to reduce costs as much as possible.
• Measure direct and indirect costs of the time staff spends in service activities.
• Determine economic impact on regulated entities.
Implement fees
• Obtain amended legislation and regulations as needed.
• Prepare those who pay fees for changes by providing advance notice and by
explaining the purpose and reasons for new fees.
• Train staff to answer questions regarding the new fees.
Source: Auditor General staff analysis of fee-setting model included in the State Agency Fees: FY 2001
Collections and Potential New Fee Revenues report prepared by the Mississippi Joint Legislative
Committee on Performance Evaluation and Expenditure Review.
Periodically reassess revenue, costs, and program outcomes to
update fee amounts
The Department should
obtain facilities’ input in
developing the fees.
Healthcare and child
care facilities fee
increases would require
legislative approval.
State of Arizona
page 20
for the assisted living, long-term care, and medical facilities programs, but
does not regularly collect data for the behavioral health and child care
programs. The Department should enhance or develop cost-data systems as
needed and as resources are available.
 Consider the effect of fee changes on licensed facilities—The Department
should determine the effect of fee changes on the licensed facilities,
particularly smaller facilities, and obtain facilities’ input in developing the fees.
If proposed fees are significantly higher than the current fees, the Department
might recommend increasing fees gradually.
Once developed or adopted, the Department should use the approach to assess
its fees and propose new fees to the Legislature as appropriate. In addition, the
Department should develop and implement policies and procedures for using the
method to periodically reassess revenues, costs, and program outcomes to
update fees as needed. Moreover, the Department may wish to consider using the
method to assess and propose any adjustments to the Division’s other fees, which
include architectural review fees and licensing fees for hearing and speech
professionals and nonnurse midwives.
Legislative action needed to revise fees—Because licensing fees for
healthcare and child care facilities are set in statute, the Legislature would need to
approve any fee increases or new fees the Department proposed. In considering
any proposed fee changes, the Legislature may also wish to consider the following
actions:
 Allow fees to be set by rule—The Legislature could consider removing the fee
amounts from statute and giving the Department authority to set fees by rule,
similar to statute governing the Department’s fees for the environmental
laboratory licensure program at the Arizona State Laboratory. A.R.S. §36-
495.06 authorizes the Department to establish fees for licensing
environmental laboratories by rule, but stipulates that fees should not exceed
the Department’s licensing costs. This revision would allow the Department to
increase fees to cover more or all of the regulatory costs and periodically
adjust fees as needed, while maintaining some legislative control over the fee
amounts.
 Establish a statutory fee-setting method—Alternatively, the Legislature could
consider replacing fee amounts in statute with a statutory method for setting
fees. For example, California uses a statutory method to set licensing fees for
healthcare facilities each year. California’s Health and Safety Code §1266
requires California to determine the fee for different types of healthcare
facilities by dividing the total cost for licensing each type of facility (based on
projected workload and budgeted costs) by the number of licensed beds (for
inpatient facilities) or the number of licensed facilities (for outpatient facilities).
Recommendations:
1.1. The Department should develop or adopt a structured approach to evaluate its
current licensing fees for healthcare and child care facilities. As part of its
approach, the Department should develop a cost-based method for calculating
fees that includes all direct and indirect costs. In developing this method, the
Department should do the following:
a. Assess the efficiency of its operations to ensure costs are as low as possible
and document the results of its assessment. The Department should seek to
minimize costs where possible.
b. Develop fees that address factors that influence cost, including licensed
capacity, the time it takes to regulate different facility types, and additional
work resulting from noncompliance with licensing rules.
c. Assess the adequacy of current systems for tracking direct and indirect cost
data for all of its licensing programs. The Department should enhance or
develop new systems as needed and as resources are available.
d. Consider the effect fee increases may have on different facilities and obtain
their input in proposing new fees. If proposed fees are significantly higher than
current fees, the Department might recommend increasing fees gradually.
1.2. Once the Department has developed its approach, it should evaluate its licensing
fees for healthcare and child care facilities and propose new fees to the Legislature
that would cover more, if not all, of its regulatory costs.
1.3. After receiving the Department’s proposal, the Legislature should consider
modifying licensing fees through revising the statutory caps, authorizing the
Department to set fees in rule, or establishing a mechanism in statute for
determining fees.
1.4. The Department should develop and implement policies and procedures for using
the approach to periodically reassess revenues, costs, and program outcomes to
update fees as needed.
Office of the Auditor General
page 21
State of Arizona
page 22
Office of the Auditor General
page a-i
APPENDIX A
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Hospital
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100
100
200
300
500 $25
per bed
$50
application fee
California 1 year $257.76
per bed
Colorado1 1 year 1-50 beds
51-150 beds
151 or more
$ 900
1,400
2,000
$12
per bed
$15
Health Care Availability Act
charge
Nevada 1 year $5,000 $30
per bed
New Mexico 1 year $6
per bed
Oregon 1 year 0-25 beds
26-49 beds
50-99 beds
100-199 beds
200 or more beds
$ 750
1,000
1,900
2,900
3,400
Texas 2 years $39
per bed
$20
Online subscription fee
Utah 2 years $400 $30
per bed
$200
per satellite location
$20
per free standing residential
treatment center
Washington 3 years $113
per bed
per year
Inpatient Hospice
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100
100
200
300
500
$25
per bed
$50
application
fee
California 2 years $1,875.41
per year
Colorado 1 year $360
Nevada 1 year $782 $92
per bed
New Mexico 1 year $100
Oregon 1 year 0-25 beds
26-49 beds
50-99 beds
100-199 beds
200 or more beds
$ 750
1,000
1,900
2,900
3,400
Texas 2 years $1,750
Utah 2 years $400 $24
per bed
Washington 2 years 0-5 beds
6-10 beds
11-15 beds
16-20 beds
$ 720
1,442
2,162
2,883
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
1 Colorado charges a maximum fee of $8,000 for hospital renewal licenses.
State of Arizona
page a-ii
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Psychiatric Hospital
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100
100
200
300
500
$25
per bed
$50
Application
fee
California 1 year $257.76
per bed
Colorado1 1 year $1,600
$12
per bed
$15
Health Care Availability Act
Charge
Nevada 1 year $5,000 $30
per bed
New Mexico 1 year $6
per bed
Oregon 1 year 0-25 beds
26-49 beds
50-99 beds
100-199 beds
200 or more beds
$ 750
1,000
1,900
2,900
3,400
Texas2 2 years $200
per bed
$20
Online subscription fee
Utah 2 years $400 $30
per bed
$200
per satellite location
$20
per free standing residential
treatment center
Washington 1 year $70
per bed
Nursing Home
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more
$100
100
200
300
500
$25
per bed
$50
Application
fee
California 1 year $287
per bed
Colorado 1 year $360
Nevada 1 year $1,100 $30
per bed
New Mexico 1 year $6
per bed
Oregon 1 year 1-15 beds
16-49 beds
50-99 beds
100-199 beds
200 or more beds
$120
175
350
450
580
Texas 2 years $250 $10
per bed
Utah 2 years $400 $24
per bed
Washington 1 year $275
per bed
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Continued)
1 Colorado charges a maximum fee of $8,000 for psychiatric hospital renewal licenses.
2 Texas requires a minimum fee of $6,000 for psychiatric hospitals.
Office of the Auditor General
page a-iii
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Home Health Agency
Arizona1 1 year $100 $50
application fee
California 1 year $4,159.42
Colorado Not state
licensed
Nevada 1 year $1,517
New Mexico 1 year $100
Oregon 1 year $600 + $600
for each
subunit
Texas 2 years $1,750
Utah 2 years $400 $1,150
agency fee
plus $200
per branch
Washington2 2 years 1-5 FTEs
6-15 FTEs
16-50 FTEs
51-100 FTEs
101 or more FTEs
$2,162
3,041
3,460
4,361
4,491
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Continued)
1 Arizona’s home health agencies have no beds. Therefore, they pay only a $50 application fee
and a $100 base fee.
2 Washington bases its licensing fee for home health agencies on full-time equivalent employee
positions.
State of Arizona
page a-iv
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Assisted Living Center
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$ 100
100
200
300
500
$25
per bed
$50
application fee
California Nonexpiring 1-3 beds
4-6 beds
7-15 beds
16-30 beds
31-49 beds
50-74 beds
75-100 beds
101-150 beds
151-200 beds
201-250 beds
251-300 beds
301-350 beds
351-400 beds
401-500 beds
501-600 beds
601-700 beds
701 or more beds
$ 375 per year
375 per year
563 per year
750 per year
938 per year
1,126 per year
1,314 per year
1,502 per year
1,751 per year
2,000 per year
2,250 per year
2,500 per year
2,750 per year
3,250 per year
3,750 per year
4,250 per year
5,000 per year
Colorado1 1 year $23
per bed
$150
application fee
Nevada 1 year 1-10 beds
11 or more beds
$1,085
1,182
$92
per bed
New
Mexico
1 year 2-29 beds
30-50 beds
51-100 beds
101-150 beds
151-200 beds
201 or more beds
$100
125
150
175
200
225
Oregon 2 years $60
Texas2 1 year $200 $10
per bed
Utah 2 years $400 $20
per bed
Washington 1 year $79
per bed
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Continued)
1 Colorado’s assisted living centers pay $15 if they have at least 35 percent of licensed beds
occupied by Medicaid enrollees, based upon claims data.
2 Texas charges a maximum fee of $1,500 for assisted living centers.
Office of the Auditor General
page a-v
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Child Care Center
Arizona 3 years $150
application fee
California 1 year 1-30 spaces
31-60 spaces
61-75 spaces
76-90 spaces
91-120 spaces
121 or more
spaces
$ 200
400
500
600
800
1,000
Colorado Nonexpiring 5-20 spaces
21-50 spaces
51-100 spaces
101-150 spaces
151-250 spaces
251 or more
spaces
$ 70 per year
110 per year
160 per year
245 per year
340 per year
480 per year
Nevada 1 year 5-6 children
7-12 children
13-50 children
51-100 children
101-150 children
151-200 children
201 or more
children
$ 20
60
100
150
200
250
300
New Mexico 1 year $55
application fee
Oregon 1 year $2
per space
Texas Nonexpiring $35
per year
$1
per child
per year
Utah 1 year $25 $1.50
per child
Washington1 3 years $4
per child
per year
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Concluded)
1 Washington child care centers with less than 13 licensed spaces pay a flat fee of $48.
Source: Auditor General staff analysis of renewal licensing fees in Arizona, California,
Colorado, Nevada, New Mexico, Oregon, Texas, Utah, and Washington obtained
from state statutes, Web sites, administrative codes, and information provided by
officials and staff in these states.
State of Arizona
page a-vi
Methodology
Auditors used several methods to study the issues in this report. General methods
included interviewing Department of Health Services (Department) and Joint
Legislative Budget Committee (JLBC) staff, and reviewing statutes, bills,
administrative code, department-prepared documents and reports, federal contract
awards, and Division of Licensing Services (Division) policies and procedures. In
addition, auditors used the following specific methods:
 License Fees—To identify the Division’s total General Fund costs and licensing
fee revenues, auditors obtained and analyzed direct cost and revenue data from
the Arizona Financial Information System (AFIS) and calculated indirect costs
using the Department’s cost-allocation rates for indirect cost and data-processing
costs for fiscal years 2006 through 2008. To identify average General
Fund costs and licensing fee revenues per facility within each licensing program
for fiscal year 2008, auditors also used data from the Division’s fiscal year 2008
performance measures on the number of facilities with active and pending
licenses.
To document growth in the Division’s licensing workload, auditors analyzed data
from reports generated from the Division’s Automated Survey Processing
Environment (ASPEN) database, which is a federally mandated database used
to implement the Division’s survey process, and the Division’s Time and Effort
(T&E) database, which records surveyors’ and team leaders’ day-to-day
activities in 15-minute increments for the assisted living, medical facilities, and
long-term care programs. From the ASPEN database, auditors analyzed data
from reports on the average number of facilities with active licenses and the
number of enforcement actions for fiscal years 2003 through 2008. From the
T&E database, auditors reviewed an average-hours report that summarized the
average time spent on licensing activities for different facilities in federal fiscal
year 2007. Auditors also reviewed internal and system controls for the ASPEN
and T&E databases and concluded that the data from these databases was
valid for use in drawing conclusions. In addition to reports from these two
Office of the Auditor General
page b-i
APPENDIX B
State of Arizona
page b-ii
databases, auditors reviewed division studies on average times spent on
licensing activities for the child care and behavioral health programs and other
data the Division provided on the number of accredited hospitals between fiscal
years 2000 and 2008.
To identify a systematic method for determining appropriate fees, auditors
reviewed literature, including a report by Mississippi’s Joint Legislative
Committee on Performance Evaluation and Expenditure Review entitled State
Agency Fees: FY 2001 Collections and Potential New Fee Revenues.1
To determine how Arizona’s licensing fees for healthcare and child care facilities
compare to other states’, auditors researched and compiled licensing fees and
other information for eight Western states (see the Appendix A bullet below).2 To
compare fees, auditors determined typical licensed capacities for Arizona's
facilities based on data provided by division staff, and used these capacities to
calculate example fees for selected facilities in all the comparison states.3
 Introduction and Background—To develop information for the Introduction and
Background section, auditors compiled unaudited information from AFIS, the
Division’s performance measures, staffing-level documents, JLBC
appropriations reports for the Department for fiscal years 2008 and 2009, state
laws, Arizona Administrative Code, the Department’s fiscal year 2007 annual
report, the Department’s Web site, and other agency-provided documents.
 Appendix A—To create Table 6, which lists renewal licensing fees and licensing
periods for nine states and seven facility types, auditors compiled information
from various sources, including other states’ Web sites, statutes, administrative
codes, state-prepared documents, and officials and staff in relevant agencies.
1 Joint Legislative Committee on Performance Evaluation and Expenditure Review: State Agency Fees: FY 2001 Collections
and Potential New Fee Revenues. Jackson, MI: Joint Legislative Committee on Performance Evaluation and Expenditure
Review, Dec. 2002.
2 Auditors selected eight states to compare with Arizona—California, Colorado, Nevada, New Mexico, Oregon, Texas,
Utah, and Washington—based on their geographic and demographic similarity to Arizona.
3 Auditors selected hospitals, psychiatric hospitals, home health agencies, assisted living facilities, nursing homes, and
child care facilities. Auditors chose these facilities to represent the five main division programs.
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
Office of the Director
150 North 18th Avenue, Suite 500 JANET NAPOLITANO, GOVERNOR
Phoenix, Arizona 85007-2670 JANUARY CONTRERAS, ACTING DIRECTOR
(602) 542-1025
(602) 542-1062 FAX
December 31, 2008
Debbie Davenport
Auditor General
2910 N. 44th Street, Suite 410
Phoenix, Arizona 85018
Dear Ms. Davenport,
Thank you for the opportunity to review the report of the performance audit of the Arizona Department of
Health Services (ADHS), Division of Licensing Services, Health Care and Child Care Facility Licensing
Fees, conducted as part of the sunset review process prescribed in Arizona Revised Statutes § 41-2951
et seq.
The findings and recommendations contained in your report have been carefully reviewed by the staff of
ADHS. In accordance with the instructions contained in your letter of December 29, 2008, the attached
response is provided.
ADHS agrees with the Auditor General’s Report regarding the increased workload, both in quantity and
complexity, including a 19 percent increase in the average number of facilities since 2003 and a 158
percent increase in disciplinary actions since 2003. In the past five years, the ability to meet this
workload has suffered, causing delays in the issuance of new licenses for businesses. This has resulted
in child care and health care facility openings to be postponed. Most of the time staff for these facilities
has already been hired, causing businesses to generate a payroll without revenues. Health care and
child care programs are not able to inspect facilities within the licensing period in a timely manner or
investigate all complaints within department guidelines, resulting in potential health and safety issues.
Finally, ADHS has not been able to provide the necessary technical assistance needed to assist facilities
to remain in compliance with the rules, thereby protecting health and safety.
ADHS appreciates the hard work and professionalism exhibited, as well as the insight, provided by your
staff during the audit process. Your staff conducted extensive research regarding licensing fee models
other states have used, and gave the time and effort to learn the very complicated licensing process.
Your work on this audit will be of great value to ADHS and ultimately to the State.
We are working diligently to develop a proposal that is both consistent with the report recommendations,
and that can enable ADHS to better recruit and retain qualified licensing staff to ensure that our mission is
accomplished timely and professionally. Progress on both of these fronts will be key to continuing to
improve ADHS’s work to protect the health and safety of Arizonans.
Sincerely,
January Contreras
Acting Director
Arizona Department of Health Services
Enclosure
Arizona Department of Health Services
Responses to Recommendations of the Auditor General’s Preliminary Draft Report
Division of Licensing, Healthcare and Child Care Facility Licensing Fees
Recommendation 1.1: The Department should develop or adopt a structured approach
to evaluate its current licensing fees for healthcare and child care facilities. As part of its
approach, the Department should develop a cost-based method for calculating fees that
includes all direct and indirect costs. In developing this method, the Department should
do the following:
a. Assess the efficiency of its operations to ensure costs are as low as possible
and document the results of its assessment. The Department should seek to
minimize costs where possible.
b. Develop fees that address factors that influence cost, including licensed
capacity, the time it takes to regulate different facility types, and additional
work resulting from noncompliance with licensing goals.
c. Assesses the adequacy of current systems for tracking direct and indirect cost
data for all of its licensing programs. The Department should enhance or
develop new systems as needed and as resources are available.
d. Consider the effect fee increases may have on different facilities and obtain
their input in proposing new fees. If proposed fees are significantly higher
than current fees, the Department might recommend increasing fees gradually.
Response: The recommendation of the Auditor General is agreed to and the
recommendation will be implemented.
Recommendation 1.2: Once the Department has developed its approach, it should
evaluate its licensing fees for healthcare and child care facilities and propose new fees to
the Legislature that would cover more, if not all, of its regulatory costs.
Response: The recommendation of the Auditor General is agreed to and the
recommendation will be implemented.
Recommendation 1.3: After receiving the Department’s proposal, the Legislature
should consider modifying licensing fees through revising the statutory caps, authorizing
the Department to set fees in rule, or establishing a mechanism in statute for determining
fees.
Response: The recommendation of the Auditor General is agreed to; however, the
Department can only submit a proposal and cannot implement this
recommendation without legislative approval.
Recommendation 1.4: The Department should develop and implement policies and
procedures for using the approach to periodically reassess revenues, costs, and program
outcomes to update fees as needed.
Response: The recommendation of the Auditor General is agreed to and the
recommendation will be implemented.
Performance Audit Division reports issued within the last 24 months
Future Performance Audit Division reports
Arizona Department of Juvenile Corrections—Rehabilitation and Re-entry Programs
Arizona Sports and Tourism Authority
Maricopa County Special Health Care District
07-12 Department of Environmental
Quality—Vehicle Emissions
Inspection Programs
07-13 Arizona Supreme Court,
Administrative Office of the
Courts—Juvenile Treatment
Programs
08-01 Electric Competition
08-02 Arizona’s Universities—
Technology Transfer Programs
08-03 Arizona’s Universities—Capital
Project Financing
08-04 Arizona’s Universities—
Information Technology Security
08-05 Arizona Biomedical Research
Commission
08-06 Board of Podiatry Examiners
07-01 Arizona Board of Fingerprinting
07-02 Arizona Department of Racing
and Arizona Racing Commission
07-03 Arizona Department of
Transportation—Highway
Maintenance
07-04 Arizona Department of
Transportation—Sunset Factors
07-05 Arizona Structural Pest Control
Commission
07-06 Arizona School Facilities Board
07-07 Board of Homeopathic Medical
Examiners
07-08 Arizona State Land Department
07-09 Commission for Postsecondary
Education
07-10 Department of Economic
Security—Division of Child
Support Enforcement
07-11 Arizona Supreme Court,
Administrative Office of the
Courts—Juvenile Detention
Centers

Copyright to this resource is held by the creating agency and is provided here for educational purposes only. It may not be downloaded, reproduced or distributed in any format without written permission of the creating agency. Any attempt to circumvent the access controls placed on this file is a violation of United States and international copyright laws, and is subject to criminal prosecution.

Debra K. Davenport
Auditor General
Performance Audit
Department of
Health Services
Division of Licensing Services—
Healthcare and Child Care Facility
Licensing Fees
Performance Audit Division
January • 2009
REPORT NO. 09-01
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Audit Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
Representative John Nelson, Chair Senator Robert Blendu, Vice Chair
Representative Tom Boone Senator Carolyn Allen
Representative Jack Brown Senator Pamela Gorman
Representative Peter Rios Senator Richard Miranda
Representative Steve Yarbrough Senator Rebecca Rios
Representative Jim Weiers (ex-officio) Senator Tim Bee (ex-officio)
Melanie M. Chesney, Director
Shan Hays, Manager and Contact Person
Jeremy Weber, Team Leader
Steven Meyeroff
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
January 7, 2009
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Ms. January Contreras, Acting Director
Department of Health Services
Transmitted herewith is a report of the Auditor General, a Performance Audit of the
Department of Health Services, Division of Licensing Services—Healthcare and Child Care
Facility Licensing Fees. This report is in response to an October 5, 2006, resolution of the
Joint Legislative Audit Committee. The performance audit was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes §41-2951 et seq. I am also
transmitting with this report a copy of the Report Highlights for this audit to provide a quick
summary for your convenience.
As outlined in its response, the Department of Health Services agrees with the finding and
plans to implement all of the recommendations directed to it.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on January 8, 2009.
Sincerely,
Debbie Davenport
Auditor General
Attachment
The Office of the Auditor General has conducted a performance audit of the
Department of Health Services (Department), Division of Licensing Services
(Division)—Healthcare and Child Care Facility Licensing Fees, pursuant to an
October 5, 2006, resolution of the Joint Legislative Audit Committee. This is the first
in a series of three reports on the Department and was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et
seq. This report focuses on licensing fees for healthcare and child care facilities. The
other two reports will focus on the Department’s substance abuse treatment
programs and the 12 statutory sunset factors.
As of October 1, 2008, the Department licensed 4,476 healthcare facilities (such as
hospitals, nursing homes, and assisted living centers) and 2,740 child care facilities
(child care centers and group homes). In fiscal year 2008, the Department conducted
15,110 inspections of these facilities and handled more than 3,300 complaints
against them. These regulatory activities cost about $10.9 million in General Fund
monies. Like other states, Arizona charges fees for state licensure. Most of these fees
are set or capped in statute and deposited into the General Fund, partially offsetting
regulatory costs. In fiscal year 2008, the Division collected less than $1.1 million in
licensing-fee revenue for these facilities.
Licensing fees could be modified to cover more
regulatory costs (see pages 9 through 21)
As of fiscal year 2008, the General Fund subsidized about 90 percent of the State’s
cost of regulating healthcare and child care facilities. Licensing fees, which cover the
remaining 10 percent, have remained largely unchanged since the 1970s and 1980s.
Although the Legislature authorized the Department to increase licensing fees to
generate an additional $600,000 in fee revenue in fiscal year 2009, even after this
increase, the General Fund will still subsidize about 85 percent of regulatory costs.1
Further, the regulatory workload has increased significantly—the number of licensed
facilities alone has increased by 19 percent between fiscal years 2003 and 2008—
and this increased workload will likely further increase the need for General Fund
monies.
1 The increased revenue will not increase the Department’s overall funding because the General Fund appropriation for
licensing was reduced by $600,000 for fiscal year 2009.
Office of the Auditor General
SUMMARY
page i
Rather than paying for regulatory costs from the General Fund, some states and
some other Arizona regulatory programs set their licensing fees to cover regulatory
costs. Arizona’s licensing fees for healthcare and child care facilities are considerably
lower than those in two states that have set healthcare licensing fees to fully cover
regulatory costs. For example, California and Nevada, which both charge hospitals
a licensing fee that covers the full regulatory cost, have licensing fees of $25,776 and
$8,000, respectively, for a 100-bed hospital, while Arizona’s fee for a hospital of the
same size is $2,850. In Arizona, licensing fees fully fund regulatory activities for such
professions as allopathic physicians, and within the Department itself, licensing fees
fully fund regulation of environmental laboratories and hearing and speech
professionals.
Although the Department does not have the authority to raise licensing fees for
healthcare and child care facilities, it is the logical place to start in developing a
proposal for possible fee increases. Licensing fees for these facilities are set in
statute, and therefore, the Legislature would need to approve any fee changes.
However, the Department is in the position to determine regulatory costs, and
therefore to develop a fee proposal that could reduce or eliminate the General Fund
subsidy. The Department should develop and implement a systematic approach to
regularly evaluate its licensing costs and propose new fees that would cover more, if
not all, of its costs. As part of this approach, the Department should consider factors
that affect costs, including licensed capacity, the time it takes to regulate different
types of facilities, and a facility’s compliance with requirements. The Department
should also assess the efficiency of its operations to ensure costs are as low as
possible, assess the adequacy of its information systems for measuring its costs,
and obtain input from the regulated facilities regarding proposed licensing fees.
Finally, the Department should develop a proposal for legislative consideration. After
receiving the Department’s proposal, the Legislature should consider modifying
licensing fees through revising the statutory caps, authorizing the Department to set
fees in rule, or establishing a mechanism in statute for determining fees.
State of Arizona
page ii
Office of the Auditor General
TABLE OF CONTENTS
continued
page iii
Introduction & Background 1
Finding 1: Licensing fees could be modified to cover more
regulatory costs 9
General Fund subsidizes cost of licensing and monitoring healthcare and
child care facilities 9
Arizona’s licensing fees outdated and not based on relevant cost factors 13
Some states go further than Arizona in basing fees on costs 14
Department should propose raising licensing fees to cover more of
regulatory costs 17
Recommendations 21
Appendix A a-i
Appendix B b-i
Agency Response
TABLE OF CONTENTS
concluded
page iv
State of Arizona
Agency Response
Tables:
1 Licensing Programs, Descriptions, and Number of Licensees
As of October 1, 2008 3
2 Licensing Fee Descriptions, Fee Amounts, and Authorizing Statutes
As of October 1, 2008 5
3 Division’s Schedule of Revenues, Expenditures, and
Other Financing Sources and Uses
Fiscal Years 2006 through 2008
(Unaudited) 6
4 General Fund Costs and Licensing Fee Revenues by Program
Fiscal Year 2008
(Unaudited) 15
5 Comparison of Renewal Licensing Fees in Arizona and
Eight Western States for Various Facility Types at
Specified Capacity Levels
Fiscal Year 2009 16
6 Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009 a-i
Figures:
1 Comparison of General Fund Costs and Licensing Fee Revenues
Fiscal Years 2006 through 2008
(Unaudited) 11
2 Mississippi Joint Legislative Committee on
Performance Evaluation and Expenditure Review
Structured Fee-Setting Process Developed for State Government 19
The Office of the Auditor General has conducted a performance audit of the
Department of Health Services (Department), Division of Licensing Services
(Division)—Healthcare and Child Care Facility Licensing Fees, pursuant to an
October 5, 2006, resolution of the Joint Legislative Audit Committee. This is the first
in a series of three reports on the Department and was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et
seq. This report focuses on licensing fees for healthcare and child care facilities. The
other two reports will focus on the Department’s substance abuse treatment
programs and the 12 statutory sunset factors.
Department licenses healthcare and child care facilities
The Department is responsible for protecting the health and safety of Arizonans in
healthcare and child care facilities by establishing and enforcing rules for the
licensure and regulation of these facilities. The Department also contracts with the
federal Centers for Medicare and Medicaid Services (CMS) and the Arizona Health
Care Cost Containment System (AHCCCS), the State’s Medicaid program, to
regulate healthcare facilities that participate in Medicare or Medicaid programs.
The Department performs these regulatory functions through its Division of Licensing
Services. As of October 1, 2008, the Division licensed 4,476 healthcare facilities
(such as hospitals, nursing homes, and assisted living centers) and 2,740 child care
facilities (child care centers and group homes). Regulatory activities include:
 Issuing licenses—The Division issues initial and renewal licenses to qualified
applicants. Licenses for healthcare facilities are valid for 1 year, while licenses for
child care facilities are valid for 3 years. The Division also issues 3-year licenses
to hospitals accredited by a nationally recognized accrediting organization.
Further, the Division issues provisional, change of ownership, and amended
licenses as needed. In fiscal year 2008, the Division issued 3,759 initial, renewal,
and other licenses to healthcare facilities and 717 licenses to child care facilities.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
 Conducting compliance surveys—The Division conducts on-site inspections,
called surveys, to determine if licensed facilities comply with applicable rules.
For most facilities, the Division conducts a survey for each initial or renewal
license issued to a facility. It does not generally conduct surveys for accredited
healthcare facilities, but may do so if the accreditation does not cover the entire
3-year license. If the Division finds that a facility is not in full compliance, it
prepares a statement of deficiencies report, requires the facility to develop and
implement a plan of correction, and conducts follow-up and other monitoring
surveys as needed. In addition, the Division conducts additional surveys for
changes that affect a license, such as changes in ownership or the number of
licensed beds, and conducts annual inspections of child care facilities. In fiscal
year 2008, the Division conducted approximately 4,209 initial and renewal
license surveys and 10,901 follow-up and other monitoring surveys for
healthcare and child care facilities.
 Handling complaints—The Division receives complaints and investigates
specific allegations of noncompliance with laws or rules against licensed
facilities. In fiscal year 2008, the Division received 2,119 complaints for
healthcare facilities and 1,182 complaints for child care facilities.
 Enforcing compliance—The Department takes enforcement actions against
facilities that are in noncompliance with applicable rules. Most enforcement
actions are civil penalty agreements, but other actions can include denying a
license application, suspending or revoking a license or certificate, and
obtaining a court-ordered injunction that prohibits a facility from continuing a
specific act that violates rules. In fiscal year 2008, the Division imposed 349 civil
penalty agreements and collected $512,565 in penalties against healthcare and
child care facilities, which are deposited in the General Fund. It also denied
seven license applications.
 Educating consumers—The Division provides the public with information on its
Web site regarding licensed facilities, survey results, enforcement actions, and
how to select appropriate care facilities.
In addition to regulating healthcare and child care facilities, the Division also licenses
hearing aid dispensers, audiologists, speech and language pathologists, nonnurse
midwives, and group homes for people with developmental disabilities. As of
October 1, 2008, the Division licensed 3,310 individual professionals and 975 group
homes for people with developmental disabilities. The Division also reviews
architectural plans for construction projects related to licensed facilities and provides
technical assistance. As shown in Table 1 (see page 3), the Division carries out its
various duties through six licensing programs.
State of Arizona
page 2
Survey—On-site inspection
of a facility, conducted by a
team of one or more
surveyors led by a survey
team leader, to determine
compliance with laws and
rules.
Licensing fees
Like other states, Arizona charges fees for state licensure.1 Most of these fees are set
or capped in statute and deposited into the General Fund, partially offsetting the cost
of licensure. Fees for licensing hearing and speech professionals, however, are set
in administrative rule, deposited into the Hearing and Speech Professionals Fund,
and cover the cost of licensing these individuals. Licensed facilities and individuals
Most license fees are
set or capped in statute.
1 The Department does not charge fees for licensing group homes for people with developmental disabilities.
Office of the Auditor General
page 3
Licensing Program Description
Number of
Licensees1
Healthcare Facility Programs
Assisted living licensing Licenses assisted living homes and
centers, adult foster care homes, and
adult day healthcare facilities. 1,930
Long-term care licensing Licenses nursing care institutions and
Intermediate Care Facilities for the
Mentally Retarded (ICFs/MR). 150
Medical facilities licensing Licenses medical facilities, including
hospitals, home health agencies,
hospices, and ambulatory surgical
and outpatient treatment centers.
1,577
Behavioral health licensing Licenses behavioral health facilities,
including inpatient, residential, and
outpatient facilities, and adult
therapeutic homes. 819
Child Care Facility Licensing Program
Child care licensing Licenses and certifies child care
centers and group homes. 2,740
Other Licensing Programs
Special licensing Licenses hearing aid dispensers,
audiologists, speech and language
pathologists, nonnurse midwives, and
group homes for people with
developmental disabilities. Also
performs other licensing-related
duties such as architectural reviews
of healthcare and child care facilities. 4,285
Table 1: Licensing Programs, Descriptions, and Number of Licensees
As of October 1, 2008
1 The numbers include only licensees with active licenses.
Source: Auditor General staff analysis of licensing information from the Division’s Web site, the Arizona
Department of Health Services 2006-2007 Annual Report, and data on the number of licensees
provided by division staff.
pay the applicable fee(s) each time they submit an application for an initial or renewal
license. As shown in Table 2 (see page 5), fees for healthcare facilities vary based on
licensed bed capacity.
Budget and staffing
The Division receives both state and federal funding. State funding consists primarily
of General Fund appropriations. Although most licensing fees are deposited into the
General Fund, fees deposited into the Hearing and Speech Professionals Fund are
appropriated to the Division for regulating hearing and speech professionals.1 The
Division also receives federal Title XVIII and Title XIX monies from CMS and AHCCCS
for Medicare and Medicaid certification. In addition, it receives federal Child Care and
Development Fund and Maternal and Child Health Services grant monies from the
U.S. Department of Health and Human Services to help pay for the cost of regulating
child care facilities and nonnurse midwives, respectively. Table 3 (see page 6) shows
the Division’s revenues and expenditures for fiscal years 2006 through 2008. The
Division’s largest expenditures are for salaries and employee-related expenses.
The Division is led by an assistant director who reports to the Department’s director.
Division staff also include a deputy assistant director, program managers, surveyors,
survey team leaders, administrative and support staff, and architects. As of
November 2008, the Division had 254.58 full-time equivalent positions, of which 31
were vacant.
Scope and objectives
This performance audit focused on determining the extent to which licensing fees for
healthcare and child care facilities cover the regulatory costs. This report has one
finding:
 Licensing fees for healthcare and child care facilities could be modified to cover
more of the State's regulatory costs. The Department should develop a cost-based
method for calculating fees, including direct and indirect licensing and
monitoring costs, and propose new fees to the Legislature based on this
method. The Legislature should consider modifying licensing fees through
revising the statutory caps, authorizing the Department to set fees in rule, or
establishing a mechanism in statute for determining fees.
This audit was conducted in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for our findings
1 Laws 2008, Chapter 291, §12, authorizes the Department to generate an additional $600,000 in licensing-fee revenue in
fiscal year 2009 (see Finding 1, pages 9 through 21). The law appropriates the $600,000 directly to the Department.
State of Arizona
page 4
Office of the Auditor General
page 5
Fee (license period) Fee Amount
Statute
Establishing Fee
Healthcare Facilities (1 year, 3 years for accredited hospitals)
Assisted living, long-term care, medical (including hospitals), and behavioral health facilities
Application fee $ 50 A.R.S. §36-405
License fee 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100 base fee
$100 base fee
$200 base fee
$300 base fee
$500 base fee
plus $25/bed1
plus $25/bed1
plus $25/bed1
plus $25/bed1
Child Care Facilities (3 years)
Child care centers
Application fee $150 A.R.S. §36-882
Late filing fee 50
Child care group homes
Application fee $30 A.R.S. §36-897.01
Late filing fee 25
Other Licensing Programs
Hearing aid dispensers (1 year)2
License fee $350 ($250 application fee, $100 license fee) A.R.S. §36-1908
Reciprocity license 200 ($100 application fee, $100 license fee)
Organization license 200 ($100 application fee, $100 license fee)
Temporary license 200 ($100 application fee, $100 license fee)
Renewal license 100
Late filing fee 25
Duplicate license fee 25
Audiologists and speech-language pathologists (1 year)2
Application fee $200 ($100 application fee, $100 license fee) A.R.S. §36-1908
Renewal fee 100
Late filing fee 25
Duplicate license fee 25
Nonnurse midwives (2 years)
Application fee $25 A.R.S. §36-758
Initial licensing fee3 25
Renewal fee3 25
Testing fee3 100
Duplicate license fee 10
Architectural drawing review
Fee Project cost:
$0-$99,999
100,000-499,999
500,000 and over
$50
100
150
A.R.S. §36-405
Table 2: Licensing Fee Descriptions, Fee Amounts, and Authorizing Statutes
As of October 1, 2008
1 Although statute establishes a $10 bed fee, the Department increased the bed fee to $25 in September 2008 in
response to Laws 2008, Chapter 291, §12, which authorized the Department to increase fees.
2 Fees for these licensees are authorized in statute, but the fee amounts are set by the Department in the Arizona
Administrative Code.
3 A.R.S. §36-758 authorizes the Department to charge up to $50 for a license and up to $250 for testing.
Source: Auditor General staff analysis of applicable Arizona Revised Statutes, Arizona Administrative Code, and session
laws.
State of Arizona
page 6
2006 2007 2008
Revenues:
State General Fund appropriations $ 7,793,273 $ 9,468,913 $ 9,841,641
Federal grants and contracts 5,577,109 4,964,529 5,959,894
Licensing fees 1,347,391 1,484,052 1,443,467
Fines, forfeits, and penalties 614,661 688,808 802,581
Other 35,104 12,647 17,074
Total revenues 15,367,538 16,618,949 18,064,657
Expenditures:1
Personal services and related benefits 11,110,201 13,035,897 14,037,597
Professional and outside services 116,690 38,995 52,152
Travel 418,209 431,114 400,651
Aid to organizations 122,307 176,907 362,999
Other operating 471,517 532,019 530,642
Equipment 121,790 224,943 81,905
Total expenditures 12,360,714 14,439,875 15,465,946
Excess of revenues over expenditures 3,006,824 2,179,074 2,598,711
Other financing sources (uses):
Remittances to the State General Fund2 (1,525,168) (1,633,142) (1,598,618)
Net operating transfers in (out) (883,783) (546,622) (1,671,959)
Total other financing sources (uses) (2,408,951) (2,179,764) (3,270,577)
Excess (deficiency) of revenues and other sources
over expenditures and other uses $ 597,873 $ (690)3 $ (671,866)3
Table 3: Division’s Schedule of Revenues, Expenditures, and
Other Financing Sources and Uses
Fiscal Years 2006 through 2008
(Unaudited)
1 Administrative adjustments are included in the fiscal year paid.
2 As required by A.R.S. §35-146 all licensing fees; fines, forfeits, and penalties; and other revenues collected by the
Division, except those deposited into the Hearing and Speech Professionals Fund and the Nursing Care Revolving
Fund, are remitted to the State General Fund.
3 According to the Division, the deficiencies in 2007 and 2008 resulted primarily from timing differences between
receipt of revenues and the use of those monies. The deficiencies were funded from unexpected prior years'
revenues.
Source: Auditor General staff analysis of the Arizona Financial Information System Accounting Event Transaction File
for fiscal years 2006 through 2008.
and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
The Auditor General and staff express appreciation to the Acting Director of the
Department of Health Services and her staff for their cooperation and assistance
throughout the audit.
Office of the Auditor General
page 7
State of Arizona
page 8
Licensing fees could be modified to cover more
regulatory costs
The licensing fees charged to healthcare and child care facilities cover only a small
part of the State’s costs of regulating the facilities and could potentially be changed
to cover more of these costs. As of fiscal year 2008, the General Fund subsidized
about 90 percent of the State’s cost to license and monitor these facilities. The fees
that cover the remaining 10 percent have been largely unchanged since the 1970s
and 1980s, and are not adequately based on relevant cost factors. Arizona’s fees are
considerably lower than those in two states that have set fees to fully recover
regulatory costs. Although decisions about the fees rest ultimately with the
Legislature, the Department of Health Services (Department) should take steps to
develop and propose fees that would more fully and accurately recoup regulatory
costs. These steps include adopting a systematic method for periodically measuring
costs, ensuring that information systems can collect the necessary data for
determining costs, and proposing appropriate fees, including obtaining input from
regulated facilities.
General Fund subsidizes cost of licensing and monitoring
healthcare and child care facilities
The General Fund subsidizes the majority of the State’s costs for licensing and
monitoring healthcare and child care facilities. Licensing-fee revenue, which helps
offset these costs, covers only a small portion of what the State spends. The portion
covered by fees has been made even smaller by the Department’s inability to issue
some licenses within statutory time frames because the Department must refund the
fee if it does not issue a license on time. Although legislation passed in 2008 will
increase fee revenue and may improve the Department’s efficiency in processing
renewal license applications, the State will likely continue to subsidize a large portion
Office of the Auditor General
page 9
FINDING 1
of licensing costs. In addition, growth in the Department’s workload and the
complexity of the licensed industries will likely create a need for additional General
Fund monies in the future.
State’s costs exceed licensing-fee revenue—In fiscal year 2008, the State
spent over $10.9 million in General Fund monies to regulate healthcare and child
care facilities but collected less than $1.1 million in fee revenue. This is less than
10 percent of the total amount spent. Arizona uses the General Fund to pay the
majority of the State’s costs for licensing and monitoring healthcare and child care
facilities.1 Although licensing fees collected from these facilities are deposited into
the General Fund and help defray the State’s costs, most of the General Fund
money spent to regulate the facilities comes from general taxes and other
revenues.
The subsidy has increased in recent years. Figure 1 (see page 11) shows how the
total cost of licensing and monitoring these facilities compares with licensing-fee
revenue for fiscal years 2006 through 2008. As shown in the figure, costs have
increased by more than $2.5 million over the past 3 years, while fee revenue has
remained relatively flat. As a result, the percentage of total costs recouped by fee
revenue has dropped from approximately 12.1 percent in fiscal year 2006 to 9.7
percent in fiscal year 2008.
Moreover, fee revenue that the Department is required to refund when it does not
issue licenses within established time frames increases the state subsidy. Arizona
Revised Statutes (A.R.S.) §41-1077 requires state agencies to refund licensing
fees if license applications are not processed within established time frames. For
example, in fiscal year 2008, the State actually received almost $1.4 million in fee
revenue, but refunded over $297,000 (approximately 22 percent) because of
missed time frames. Most of the refunds were for assisted living and long-term
care facilities.
Recent legislative changes will have limited effect on subsidy—The
Legislature took two separate actions in 2008 that will increase fee revenues, but
these changes are not likely to have much impact on reducing the General Fund
subsidy. Specifically:
 Laws 2008, Chapter 291, §12, authorized the Department to increase any of
its fees to generate $600,000 in additional revenue during fiscal year 2009.2
The Department decided to raise licensing fees for healthcare facilities with
inpatient beds, such as hospitals, nursing homes, and assisted living centers,
by increasing the per-bed portion of the fee to $25 from the previous amount
of $10. The fee increase went into effect for all licenses that expired on or after
In fiscal year 2008, the
State collected fees
equal to less than 10
percent of the total
amount spent to
regulate healthcare and
child care facilities.
2008 legislation
authorized the
Department to increase
fees by a total of
$600,000 in fiscal year
2009.
1 General Fund monies also pay for the cost of state matching requirements for federal Title XIX funding the Department
receives for performing Medicaid certification duties related to healthcare facilities. The State matches $1 for every $1 of
Title XIX monies received for assisted living and behavioral health programs, and $1 for every $3 of Title XIX monies
received for the long-term care program.
2 The increased revenue will not increase the Department’s overall revenues because the General Fund appropriation for
licensing was reduced by $600,000 for fiscal year 2009.
State of Arizona
page 10
September 30, 2008. However, the fee increase will have limited impact on
total revenue. Although department officials believe the fee increase will
generate the full $600,000 in additional revenue authorized by the law, the
amount is less than 6 percent of the total General Fund cost of regulating
healthcare and child care facilities in fiscal year 2008. Moreover, the fee
increase does not affect facilities that do not have inpatient beds, such as
outpatient treatment centers. As of October 2008, almost 43 percent of state-licensed
healthcare facilities had no inpatient beds.
 Laws 2008, Chapter 66, allows the Department to conduct the on-site
compliance survey for healthcare and child care facility renewal licenses at
any time during the license period, instead of having to conduct the survey
before issuing the license. Division of Licensing Services (Division)
management believes this change will help licensing staff schedule their work
Office of the Auditor General
page 11
$0
$2
$4
$6
$8
$10
$12
2006 2007 2008
Dollars
(In Millions)
Costs Licensing-Fee Revenues
Figure 1: Comparison of General Fund Costs1 and Licensing Fee Revenues
Fiscal Years 2006 through 2008
(Unaudited)
1 Amounts include indirect costs incurred by the Division and the Department for regulating healthcare
and child care facilities. Amounts also include General Fund monies used for state matching
requirements for Title XIX funding for Medicaid certification. The state matching portion of the costs
was approximately $1 million in fiscal year 2006, $1.2 million in fiscal year 2007, and $1.3 million in
fiscal year 2008.
Source: Auditor General staff analysis of data from the Arizona Financial Information System
Accounting Event Transaction File and the Department’s cost-allocation rates for indirect and
data-processing costs for fiscal years 2006 through 2008.
more efficiently, particularly for surveys that require travel, and issue renewal
licenses within established time frames, thereby reducing refunds. However,
even a complete elimination of refunds would have a limited impact on the
General Fund subsidy. The $297,000 refunded in fiscal year 2008 is less than
3 percent of the General Fund cost of regulating healthcare and child care
facilities in that year.
Increased workload will likely affect need for General Fund monies—
Even with these legislative changes, growth in the volume and complexity of work
the Division performs will likely increase the need for General Fund monies. The
Division’s workload grew significantly between fiscal years 2003 and 2008.
According to division data, the average number of healthcare and child care
facilities with active licenses increased over 19 percent between fiscal years 2003
and 2008, from 5,857 to 6,978 facilities. Most of this growth occurred in the
assisted living, medical facilities, and child care programs. In addition, the number
of hospitals that do not have accreditation and thus require an annual compliance
survey for licensure has grown from 11 out of 76 hospitals in 2000 to 30 out of 89
hospitals in 2008.
Besides the growth in number of facilities, surveys have become more complex
and enforcement actions have increased. According to division management,
licensed healthcare facilities are providing more complex and sophisticated
patient care than ever before. Management believes that this increase in the
complexity of patient care and other factors have led to lengthier, more complex
surveys and complaint investigations, and increased enforcement actions. These
factors include nursing and child care staff shortages in the healthcare and child
care industries, an increase in lawsuits that rely on the results of complaint
investigations, and greater public awareness of the Division’s regulatory role.
Division management also reported that a slight increase in the number of
complaints against unlicensed facilities and an increase in the number of private
doctors who are joining their practices with medical facilities are also increasing
the Division’s workload. Overall, division data shows that the number of
enforcement actions against healthcare and child care facilities combined
increased 158 percent over the past 5 years, from 212 actions in fiscal year 2003
to 547 actions in fiscal year 2008. The assisted living, long-term care, and child
care programs had the greatest increase in the number of actions. Enforcement
actions can require significant amounts of staff time.
Department and division management believe these trends have and will continue
to increase the need for additional General Fund monies. State financial data
shows that the Division’s General Fund appropriations increased nearly 43 percent
since fiscal year 2003, from over $6.5 million that year to over $9.3 million in fiscal
year 2009.
State of Arizona
page 12
The average number of
licensed facilities
increased over 19
percent between fiscal
years 2003 and 2008.
Arizona’s licensing fees outdated and not based on
relevant cost factors
Arizona’s licensing fees for healthcare and child care facilities had not been updated
for many years until some fees were increased in September 2008, and as discussed
previously, this increase will not substantially change the subsidy. In addition,
Arizona’s fees are not adequately based on factors that affect cost.
Licensing fees have not changed in several years—Arizona has not
updated its licensing fees for child care facilities in at least 20 years, and its fees
for healthcare facilities had not changed for nearly that long until the legislative
change that took effect in September 2008. The licensing
fee for child care centers was last updated in 1976 when it
increased from $25 to $50 per year. The fee for child care
group homes has remained $30 for a 3-year certificate since
it was established in 1988.1 Until the bed fee increased in
September 2008, licensing fees for healthcare facilities had
not changed since they were established in 1989. However,
although the bed fee has increased from $10 to $25 per
bed, the base and application fees have not changed.
Consequently, the fee increase does not affect the 43
percent of facilities without licensed beds, such as
outpatient treatment centers.
According to division management, the Department has
had internal discussions about proposing fee increases in
the past, but these discussions have never led to a
legislative proposal because of concerns that there would
be a lack of support.
Licensing fees not based on costs—The State’s licensing fees for healthcare
and child care facilities are not adequately based on factors that can affect the
costs of regulating a particular facility. Some factors that can affect costs include:
 Licensed capacity—The Division’s costs may vary depending on licensed
capacity. For example, the survey for a child care center with a licensed
capacity of several hundred spaces may take longer than the survey for a
center with a licensed capacity of 20 spaces. Although Arizona’s fees for
healthcare facilities vary based on capacity, fees for child care facilities do not.
Consequently, a child care center with several hundred licensed spaces pays
the same fee as a center with 20 licensed spaces.
 Type of facility—Regulatory costs may also vary depending on the type of
facility and the applicable rules and regulations. Some facilities require more
time to regulate than others. For example, according to division data, a
The Division’s regulatory
costs may vary
depending on the facility
type.
1 Although the licensing fees have not changed, in 1992 the Legislature added a late application fee of $50 for child care
centers and $25 for child care group homes.
Office of the Auditor General
page 13
Year in which Arizona’s licensing fees
for child care and healthcare facilities
were last modified
Facility Type Year
Child Care Facilities
Child Care Centers 1976
Child Care Group Homes 1988
Healthcare Facilities
Application Fee 1989
Base Fee 1989
Bed Fee 2008
Sources: Auditor General staff analysis of Arizona Revised Statutes
and session laws.
renewal survey for state licensure of an assisted living center, which has a
typical licensed capacity of 70 beds, can take approximately 21 person-hours,
while the survey for a home health agency, which has no licensed capacity,
can take 33 person-hours. Consequently, capacity may not fully account for
differences in survey times resulting from differences in facility types. Although
Arizona charges different fees for different types of child care facilities,
healthcare facilities with the same capacity pay the same fee regardless of
facility type.
In addition, A.R.S. §§36-885 and 36-897.05 require the Division to conduct
annual inspections of child care facilities, but these facilities have 3-year
licenses. Thus, regulatory costs are incurred annually, while revenue is only
collected every 3 years.
 Facilities’ compliance with requirements—The Division’s costs may also vary
depending on a facility’s compliance with rules and regulations.
Noncompliance can result in follow-up inspections, complaint investigations,
and enforcement actions, which increase the cost of regulating facilities. In
Arizona, facilities that require follow-up inspections and complaint
investigations do not pay more for their licenses than facilities that comply with
requirements.
Because fees do not account for all of the factors that may affect costs, the
General Fund subsidizes some licensing programs more than others. As seen in
Table 4 (see page 15), although none of the Division’s healthcare and child care
licensing programs’ revenues cover the programs’ costs, some programs’
revenues covered more costs than others’. Further, the average costs to regulate
facilities vary by program. Thus, although all of the programs were subsidized, fees
that do not account for differences in costs might be inequitable.
Some states go further than Arizona in basing fees on
costs
To provide points of comparison with Arizona’s fees and practices, auditors
contacted eight Western states.1 Nearly all of these states go beyond Arizona in
taking facility type and capacity into account in their fee structures, and some go
beyond Arizona in attempting to recover regulatory costs.
Other states’ fees take relevant cost factors more into account—
Compared with Arizona’s fee structure, fees in the eight other states generally had
greater differentiation based on the type and size of facilities. Specifically:
Arizona’s healthcare
and child care facility
licensing fees are not
adequately based on
relevant cost factors.
1 The eight states—California, Colorado, Nevada, New Mexico, Oregon, Texas, Utah, and Washington—were selected
based on their geographic and demographic similarity to Arizona.
State of Arizona
page 14
 Licensed capacity—In Arizona, fees for child care facilities do not vary by
capacity. Seven of the eight comparison states charge renewal licensing fees
for child care centers that vary based on capacity.
 Type of facility—Although Arizona’s fees for healthcare facilities do not vary by
facility type, fees in all eight comparison states often do. (see Table 6 in
Appendix A, pages a-i through a-v). Two of these states, California and
Nevada, set fees for different healthcare facility types based on the time it
takes to regulate them.
 Facilities’ compliance with requirements—Two of the states that auditors
reviewed—Washington and California—have additional fees for non-compliance.
Specifically, Washington has established fees for on-site surveys
resulting from substantiated complaints and other follow-up surveys for some
of its healthcare facilities. Additionally, for assisted living and child care
facilities, California has established probation-monitoring fees for facilities that
are on probation and plan-of-correction fees for facilities that fail to implement
corrective plans by a specified date.
Some states have set fees to cover full regulatory costs—Arizona’s
licensing fees are considerably lower than those in two states that set their fees to
fully recover regulatory costs. Table 5 (see page 16) compares Arizona’s fees with
eight other states’ fees using example fees for seven types of facilities, including
hospitals, nursing homes, and child care centers.1 Auditors based the example
Arizona’s licensing fees
are much lower than
two Western states
where fees are set to
cover full regulatory
costs.
Office of the Auditor General
page 15
Assisted
Living
Program
Long-Term
Care
Program
Medical
Facilities
Program
Behavioral
Health
Program
Child
Care
Program Total
Number of facilities1 2,044 152 1,618 881 2,929 7,624
Costs $2,933,782 $1,303,751 $1,212,180 $1,469,562 $4,012,855 $10,932,130
Licensing fee revenue 431,593 80,820 221,310 178,550 150,565 1,062,838
Average costs per facility 1,435 8,577 749 1,668 1,370 1,434
Average revenue per facility 211 532 137 203 51 139
Revenue as a percentage of costs 14.7% 6.2% 18.3% 12.1% 3.8% 9.7%
Table 4: General Fund Costs and Licensing Fee Revenues by Program
Fiscal Year 2008
(Unaudited)
1 The number of facilities is based on the average number of facilities with active and pending licenses for the fiscal year. The numbers may
include a small number of facilities that do not pay licensing fees because they are exempted from doing so by statute or because they
are federally certified but not state licensed.
Source: Auditor General staff analysis of data from the Arizona Financial Information System Accounting Event Transaction File, the
Department’s cost-allocation rates for indirect and data-processing costs, and data on licensees from the Division’s performance
measures for fiscal year 2008.
1 See Table 6 in Appendix A (pages a-i through a-v) for a more complete comparison of renewal licensing fee schedules
across all nine states.
State of Arizona
page 16
Hospital
(100 beds)
Inpatient Hospice
(10 beds)
Psychiatric Hospital
(45 beds)
Nursing Home
(120 beds)
Home Health
Agency3
Assisted Living
Center
(70 beds)
Child Care Center
(100 spaces)
California $25,776 California $1,875 California $11,599 California $34,440 California $4,159 Nevada $7,622 California $800
Washington 11,300 Nevada 1,702 Nevada 6,350 Washington 33,000 Nevada 1,517 Washington 5,530 Washington 400
Nevada 8,000 Texas 875 Texas 4,510 Nevada 4,700 Washington 1,081 Arizona 2,000 Oregon 200
Oregon 2,900 Oregon 750 Washington 3,150 Arizona 3,350 Texas 875 Colorado 1,760 Utah 175
Arizona 2,850 Washington 721 Colorado 2,155 Utah 1,640 Utah 755 California 1,126 Colorado 160
Colorado 2,615 Arizona 400 Arizona 1,275 Texas 725 Oregon 600 Utah 900 Nevada 150
Texas 1,960 Colorado 360 Oregon 1,000 New Mexico 720 Arizona 150 Texas 450 Texas 135
Utah 1,700 Utah 320 Utah 875 Oregon 450 New Mexico 100 New Mexico 150 New Mexico 55
New Mexico 600 New Mexico 100 New Mexico 270 Colorado 360 Oregon 30 Arizona 50
Table 5: Comparison of Renewal Licensing Fees in Arizona and
Eight Western States for Various Facility Types at
Specified Capacity Levels1, 2
Fiscal Year 2009
1 The table compares renewal licensing fees for the following states: Arizona, California, Colorado, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. Auditors
selected at least one facility type from each of Arizona’s facility licensing programs. Auditors selected the bed capacities based on typical capacities for Arizona’s facilities.
See Table 6 in Appendix A for a comparison of the renewal fee schedules for all nine states.
2 The fees include all application, capacity, and other fees charged for renewal licenses in these states. In addition, auditors have adjusted the fees to account for
differences in licensure periods. The table compares the annual portion of each state’s fees.
3 Home health agencies have no bed capacity. In 2008, Colorado passed legislation to begin licensing home care agencies by June 2009.
Source: Auditor General staff analysis of data on licensed capacities for the selected facilities provided by the Division and information obtained from the selected states’
statutes, Web sites, administrative codes, and officials and staff in these states.
Office of the Auditor General
page 17
fees on typical licensed capacities for such facilities in Arizona. As the table shows,
compared to all eight states, Arizona’s licensing fees are relatively low for inpatient
hospices, psychiatric hospitals, home health agencies, and child care centers, but
at or above the middle fee for assisted living centers, nursing homes, and
hospitals.
Most notably, Arizona’s fees were often much lower than fees in three states—
California, Nevada, and Washington. Two of these states, California and Nevada,
have set fees for licensed healthcare facilities so that fee revenue covers the cost
of regulating them.1 For example, California passed legislation in 2006 that
requires the agency that regulates healthcare facilities to be entirely supported by
federal funding and fee revenue, unless General Fund monies are specifically
appropriated. Consequently, California has set fees to cover the cost of regulating
licensed healthcare facilities, such as hospitals and nursing homes. According to
a state official, California’s General Fund is not expected to subsidize any of the
estimated $91 million cost to regulate healthcare facilities in fiscal year 2009.
Nevada has also set fees to cover the costs of regulating healthcare facilities,
including hospitals, and does not rely on General Fund appropriations.
Department should propose raising licensing fees to
cover more of regulatory costs
Although the Department does not have the authority to raise licensing fees for
healthcare and child care facilities, it is the logical place to start in developing a
proposal for possible fee increases. Licensing fees for these facilities are set in
statute, and therefore, the Legislature would need to approve any fee changes.
However, the Department is in the position to determine regulatory costs, and
therefore to develop a fee proposal that could reduce or eliminate the General Fund
subsidy. Arizona relies entirely on fee revenue to cover costs for some other
regulatory activities. To propose fees that would more fully and accurately recoup
regulatory costs, however, the Department would need to adopt a systematic method
for periodically measuring costs, ensure that information systems
can collect the necessary data for determining costs, and obtain
input from regulated facilities. The Legislature could then
consider various options for implementing the proposal, if it so
chooses.
Raising fees to cover costs is an option—Using fees to
fully cover regulatory costs occurs in Arizona and other state
governments. For example, in Arizona, 90/10 boards, such as
the Arizona Medical Board, which regulates allopathic
physicians, are entirely funded by revenue derived from the
1 Another comparison state, Colorado, also passed legislation in 2007 to fund the regulation of its healthcare facilities solely
with fee revenue. Colorado has revised fees to cover the costs of regulating hospitals and psychiatric hospitals, but is still
in the process of revising fees for other facilities.
Arizona 90/10 Board—A board, usually a
regulatory board, that keeps 90 percent of
its revenue and remits 10 percent to the
General Fund. The revenue kept by the
board finances 100 percent of the board’s
regulatory costs.
Source: Auditor General staff analysis of information from the
Arizona Department of Administration’s General
Accounting Office Web site.
The Department should
seek to minimize costs
where possible.
1 Joint Legislative Committee on Performance Evaluation and Expenditure Review: State Agency Fees: FY 2001Collections
and Potential New Fee Revenues. Jackson, MI: Joint Legislative Committee on Performance Evaluation and Expenditure
Review, Dec. 2002.
2 According to PEER, the approach was based on a review of academic literature, economics theory, and policies and
procedures from various states and the United States and Canadian governments.
State of Arizona
page 18
regulated entities. Within the Department itself, licensing fees fully fund the Arizona
State Laboratory’s environmental laboratory licensure program as well as the
Division’s regulation of hearing and speech professionals. In addition, as
mentioned previously, some states, such as California and Nevada, use licensing-fee
revenue to pay for the cost of regulating some facilities, and Colorado is
currently moving toward doing so.
Department should evaluate fees and propose adjustments as
needed—The Department should develop or adopt a structured approach to
evaluate its licensing fees and propose new fees that would cover more, if not all,
of its costs. Mississippi’s Joint Legislative Committee on Performance Evaluation
and Expenditure Review (PEER) developed an approach for evaluating and setting
fees that the Department might find useful.1 PEER’s approach consists of a
decision model for establishing or increasing government fees, called the Theory
of Fee Setting in Government, as well as guidance on implementing new fees.2
Figure 2 (see page 19) summarizes key concepts from PEER’s approach.
As part of its approach, the Department should develop an appropriate method for
calculating fees based on direct and indirect costs for licensing and monitoring
healthcare and child care facilities. In doing so, the Department might want to
consider contacting other states, such as California and Nevada, to determine how
they calculate their fees and what effect raising fees to cover costs had on their
licensed facilities. In addition, the Department should do the following:
 Assess efficiency of operations—The Department should assess the
efficiency of its operations to ensure costs are as low as possible and
document the results of its assessment. The Department should seek to
minimize costs where possible.
 Develop fees based on relevant cost factors—To make fees more equitable,
the Department should consider charging fees based on licensed capacity
and the time it takes to regulate different facilities for both healthcare and child
care facilities. In addition, the Department should determine an appropriate
method for including the cost of follow-up inspections, complaint
investigations, and other monitoring activities that result from noncompliance
with licensing rules. For example, the Department could consider charging
separate fees for these activities.
 Assess adequacy of current information systems—The Department should
assess the adequacy of its current systems for tracking direct and indirect
cost data related to its licensing activities. It should also track time spent on
licensing and monitoring activities for all of its licensing programs. The
Department uses a federal information system to track time spent on activities
Arizona’s 90/10 boards
and some other
licensure programs
have fees that fully
cover regulatory costs.
Office of the Auditor General
page 19
Figure 2: Mississippi Joint Legislative Committee on
Performance Evaluation and Expenditure Review
Structured Fee-Setting Process Developed for State Government
Determine whether fees or taxes should fund the service
Who benefits from the service: individuals, the public, or both?
• Fees should be used to finance services that benefit individuals.
• Taxes should be used to finance services that benefit the public.
• When both individuals and the public benefit from a service, financing can come
from both fees and taxes.
Identify and analyze legal issues
• Are fees limited by statute?
• If so, is legislation required to change them?
• Should administrative rules be revised?
Identify the purpose of the fee
• Should the fee cover the cost of providing the service?
• Should fees be set to influence behavior?
• Should fees be set to encourage compliance with program regulations
and goals?
Assess factors influencing the fee amount
• What effect will the fee have on those who pay the fee?
• What effect will the fee have on annual revenue?
• What do similar states charge for the service?
• Will the public accept the necessity of the fee?
• Is the Department subsidizing other government operations?
Determine appropriate methodology for setting fees
• Determine if there is a comprehensive cost-accounting system.
• Seek to reduce costs as much as possible.
• Measure direct and indirect costs of the time staff spends in service activities.
• Determine economic impact on regulated entities.
Implement fees
• Obtain amended legislation and regulations as needed.
• Prepare those who pay fees for changes by providing advance notice and by
explaining the purpose and reasons for new fees.
• Train staff to answer questions regarding the new fees.
Source: Auditor General staff analysis of fee-setting model included in the State Agency Fees: FY 2001
Collections and Potential New Fee Revenues report prepared by the Mississippi Joint Legislative
Committee on Performance Evaluation and Expenditure Review.
Periodically reassess revenue, costs, and program outcomes to
update fee amounts
The Department should
obtain facilities’ input in
developing the fees.
Healthcare and child
care facilities fee
increases would require
legislative approval.
State of Arizona
page 20
for the assisted living, long-term care, and medical facilities programs, but
does not regularly collect data for the behavioral health and child care
programs. The Department should enhance or develop cost-data systems as
needed and as resources are available.
 Consider the effect of fee changes on licensed facilities—The Department
should determine the effect of fee changes on the licensed facilities,
particularly smaller facilities, and obtain facilities’ input in developing the fees.
If proposed fees are significantly higher than the current fees, the Department
might recommend increasing fees gradually.
Once developed or adopted, the Department should use the approach to assess
its fees and propose new fees to the Legislature as appropriate. In addition, the
Department should develop and implement policies and procedures for using the
method to periodically reassess revenues, costs, and program outcomes to
update fees as needed. Moreover, the Department may wish to consider using the
method to assess and propose any adjustments to the Division’s other fees, which
include architectural review fees and licensing fees for hearing and speech
professionals and nonnurse midwives.
Legislative action needed to revise fees—Because licensing fees for
healthcare and child care facilities are set in statute, the Legislature would need to
approve any fee increases or new fees the Department proposed. In considering
any proposed fee changes, the Legislature may also wish to consider the following
actions:
 Allow fees to be set by rule—The Legislature could consider removing the fee
amounts from statute and giving the Department authority to set fees by rule,
similar to statute governing the Department’s fees for the environmental
laboratory licensure program at the Arizona State Laboratory. A.R.S. §36-
495.06 authorizes the Department to establish fees for licensing
environmental laboratories by rule, but stipulates that fees should not exceed
the Department’s licensing costs. This revision would allow the Department to
increase fees to cover more or all of the regulatory costs and periodically
adjust fees as needed, while maintaining some legislative control over the fee
amounts.
 Establish a statutory fee-setting method—Alternatively, the Legislature could
consider replacing fee amounts in statute with a statutory method for setting
fees. For example, California uses a statutory method to set licensing fees for
healthcare facilities each year. California’s Health and Safety Code §1266
requires California to determine the fee for different types of healthcare
facilities by dividing the total cost for licensing each type of facility (based on
projected workload and budgeted costs) by the number of licensed beds (for
inpatient facilities) or the number of licensed facilities (for outpatient facilities).
Recommendations:
1.1. The Department should develop or adopt a structured approach to evaluate its
current licensing fees for healthcare and child care facilities. As part of its
approach, the Department should develop a cost-based method for calculating
fees that includes all direct and indirect costs. In developing this method, the
Department should do the following:
a. Assess the efficiency of its operations to ensure costs are as low as possible
and document the results of its assessment. The Department should seek to
minimize costs where possible.
b. Develop fees that address factors that influence cost, including licensed
capacity, the time it takes to regulate different facility types, and additional
work resulting from noncompliance with licensing rules.
c. Assess the adequacy of current systems for tracking direct and indirect cost
data for all of its licensing programs. The Department should enhance or
develop new systems as needed and as resources are available.
d. Consider the effect fee increases may have on different facilities and obtain
their input in proposing new fees. If proposed fees are significantly higher than
current fees, the Department might recommend increasing fees gradually.
1.2. Once the Department has developed its approach, it should evaluate its licensing
fees for healthcare and child care facilities and propose new fees to the Legislature
that would cover more, if not all, of its regulatory costs.
1.3. After receiving the Department’s proposal, the Legislature should consider
modifying licensing fees through revising the statutory caps, authorizing the
Department to set fees in rule, or establishing a mechanism in statute for
determining fees.
1.4. The Department should develop and implement policies and procedures for using
the approach to periodically reassess revenues, costs, and program outcomes to
update fees as needed.
Office of the Auditor General
page 21
State of Arizona
page 22
Office of the Auditor General
page a-i
APPENDIX A
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Hospital
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100
100
200
300
500 $25
per bed
$50
application fee
California 1 year $257.76
per bed
Colorado1 1 year 1-50 beds
51-150 beds
151 or more
$ 900
1,400
2,000
$12
per bed
$15
Health Care Availability Act
charge
Nevada 1 year $5,000 $30
per bed
New Mexico 1 year $6
per bed
Oregon 1 year 0-25 beds
26-49 beds
50-99 beds
100-199 beds
200 or more beds
$ 750
1,000
1,900
2,900
3,400
Texas 2 years $39
per bed
$20
Online subscription fee
Utah 2 years $400 $30
per bed
$200
per satellite location
$20
per free standing residential
treatment center
Washington 3 years $113
per bed
per year
Inpatient Hospice
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100
100
200
300
500
$25
per bed
$50
application
fee
California 2 years $1,875.41
per year
Colorado 1 year $360
Nevada 1 year $782 $92
per bed
New Mexico 1 year $100
Oregon 1 year 0-25 beds
26-49 beds
50-99 beds
100-199 beds
200 or more beds
$ 750
1,000
1,900
2,900
3,400
Texas 2 years $1,750
Utah 2 years $400 $24
per bed
Washington 2 years 0-5 beds
6-10 beds
11-15 beds
16-20 beds
$ 720
1,442
2,162
2,883
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
1 Colorado charges a maximum fee of $8,000 for hospital renewal licenses.
State of Arizona
page a-ii
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Psychiatric Hospital
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$100
100
200
300
500
$25
per bed
$50
Application
fee
California 1 year $257.76
per bed
Colorado1 1 year $1,600
$12
per bed
$15
Health Care Availability Act
Charge
Nevada 1 year $5,000 $30
per bed
New Mexico 1 year $6
per bed
Oregon 1 year 0-25 beds
26-49 beds
50-99 beds
100-199 beds
200 or more beds
$ 750
1,000
1,900
2,900
3,400
Texas2 2 years $200
per bed
$20
Online subscription fee
Utah 2 years $400 $30
per bed
$200
per satellite location
$20
per free standing residential
treatment center
Washington 1 year $70
per bed
Nursing Home
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more
$100
100
200
300
500
$25
per bed
$50
Application
fee
California 1 year $287
per bed
Colorado 1 year $360
Nevada 1 year $1,100 $30
per bed
New Mexico 1 year $6
per bed
Oregon 1 year 1-15 beds
16-49 beds
50-99 beds
100-199 beds
200 or more beds
$120
175
350
450
580
Texas 2 years $250 $10
per bed
Utah 2 years $400 $24
per bed
Washington 1 year $275
per bed
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Continued)
1 Colorado charges a maximum fee of $8,000 for psychiatric hospital renewal licenses.
2 Texas requires a minimum fee of $6,000 for psychiatric hospitals.
Office of the Auditor General
page a-iii
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Home Health Agency
Arizona1 1 year $100 $50
application fee
California 1 year $4,159.42
Colorado Not state
licensed
Nevada 1 year $1,517
New Mexico 1 year $100
Oregon 1 year $600 + $600
for each
subunit
Texas 2 years $1,750
Utah 2 years $400 $1,150
agency fee
plus $200
per branch
Washington2 2 years 1-5 FTEs
6-15 FTEs
16-50 FTEs
51-100 FTEs
101 or more FTEs
$2,162
3,041
3,460
4,361
4,491
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Continued)
1 Arizona’s home health agencies have no beds. Therefore, they pay only a $50 application fee
and a $100 base fee.
2 Washington bases its licensing fee for home health agencies on full-time equivalent employee
positions.
State of Arizona
page a-iv
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Assisted Living Center
Arizona 1 year 0 beds
1-59 beds
60-99 beds
100-149 beds
150 or more beds
$ 100
100
200
300
500
$25
per bed
$50
application fee
California Nonexpiring 1-3 beds
4-6 beds
7-15 beds
16-30 beds
31-49 beds
50-74 beds
75-100 beds
101-150 beds
151-200 beds
201-250 beds
251-300 beds
301-350 beds
351-400 beds
401-500 beds
501-600 beds
601-700 beds
701 or more beds
$ 375 per year
375 per year
563 per year
750 per year
938 per year
1,126 per year
1,314 per year
1,502 per year
1,751 per year
2,000 per year
2,250 per year
2,500 per year
2,750 per year
3,250 per year
3,750 per year
4,250 per year
5,000 per year
Colorado1 1 year $23
per bed
$150
application fee
Nevada 1 year 1-10 beds
11 or more beds
$1,085
1,182
$92
per bed
New
Mexico
1 year 2-29 beds
30-50 beds
51-100 beds
101-150 beds
151-200 beds
201 or more beds
$100
125
150
175
200
225
Oregon 2 years $60
Texas2 1 year $200 $10
per bed
Utah 2 years $400 $20
per bed
Washington 1 year $79
per bed
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Continued)
1 Colorado’s assisted living centers pay $15 if they have at least 35 percent of licensed beds
occupied by Medicaid enrollees, based upon claims data.
2 Texas charges a maximum fee of $1,500 for assisted living centers.
Office of the Auditor General
page a-v
Fee Schedule
State
License
Period Base Fee
Capacity
Fee Other Fees
Child Care Center
Arizona 3 years $150
application fee
California 1 year 1-30 spaces
31-60 spaces
61-75 spaces
76-90 spaces
91-120 spaces
121 or more
spaces
$ 200
400
500
600
800
1,000
Colorado Nonexpiring 5-20 spaces
21-50 spaces
51-100 spaces
101-150 spaces
151-250 spaces
251 or more
spaces
$ 70 per year
110 per year
160 per year
245 per year
340 per year
480 per year
Nevada 1 year 5-6 children
7-12 children
13-50 children
51-100 children
101-150 children
151-200 children
201 or more
children
$ 20
60
100
150
200
250
300
New Mexico 1 year $55
application fee
Oregon 1 year $2
per space
Texas Nonexpiring $35
per year
$1
per child
per year
Utah 1 year $25 $1.50
per child
Washington1 3 years $4
per child
per year
Table 6: Renewal Licensing Fee Schedules for Arizona and
Eight Western States by Facility Type
Fiscal Year 2009
(Concluded)
1 Washington child care centers with less than 13 licensed spaces pay a flat fee of $48.
Source: Auditor General staff analysis of renewal licensing fees in Arizona, California,
Colorado, Nevada, New Mexico, Oregon, Texas, Utah, and Washington obtained
from state statutes, Web sites, administrative codes, and information provided by
officials and staff in these states.
State of Arizona
page a-vi
Methodology
Auditors used several methods to study the issues in this report. General methods
included interviewing Department of Health Services (Department) and Joint
Legislative Budget Committee (JLBC) staff, and reviewing statutes, bills,
administrative code, department-prepared documents and reports, federal contract
awards, and Division of Licensing Services (Division) policies and procedures. In
addition, auditors used the following specific methods:
 License Fees—To identify the Division’s total General Fund costs and licensing
fee revenues, auditors obtained and analyzed direct cost and revenue data from
the Arizona Financial Information System (AFIS) and calculated indirect costs
using the Department’s cost-allocation rates for indirect cost and data-processing
costs for fiscal years 2006 through 2008. To identify average General
Fund costs and licensing fee revenues per facility within each licensing program
for fiscal year 2008, auditors also used data from the Division’s fiscal year 2008
performance measures on the number of facilities with active and pending
licenses.
To document growth in the Division’s licensing workload, auditors analyzed data
from reports generated from the Division’s Automated Survey Processing
Environment (ASPEN) database, which is a federally mandated database used
to implement the Division’s survey process, and the Division’s Time and Effort
(T&E) database, which records surveyors’ and team leaders’ day-to-day
activities in 15-minute increments for the assisted living, medical facilities, and
long-term care programs. From the ASPEN database, auditors analyzed data
from reports on the average number of facilities with active licenses and the
number of enforcement actions for fiscal years 2003 through 2008. From the
T&E database, auditors reviewed an average-hours report that summarized the
average time spent on licensing activities for different facilities in federal fiscal
year 2007. Auditors also reviewed internal and system controls for the ASPEN
and T&E databases and concluded that the data from these databases was
valid for use in drawing conclusions. In addition to reports from these two
Office of the Auditor General
page b-i
APPENDIX B
State of Arizona
page b-ii
databases, auditors reviewed division studies on average times spent on
licensing activities for the child care and behavioral health programs and other
data the Division provided on the number of accredited hospitals between fiscal
years 2000 and 2008.
To identify a systematic method for determining appropriate fees, auditors
reviewed literature, including a report by Mississippi’s Joint Legislative
Committee on Performance Evaluation and Expenditure Review entitled State
Agency Fees: FY 2001 Collections and Potential New Fee Revenues.1
To determine how Arizona’s licensing fees for healthcare and child care facilities
compare to other states’, auditors researched and compiled licensing fees and
other information for eight Western states (see the Appendix A bullet below).2 To
compare fees, auditors determined typical licensed capacities for Arizona's
facilities based on data provided by division staff, and used these capacities to
calculate example fees for selected facilities in all the comparison states.3
 Introduction and Background—To develop information for the Introduction and
Background section, auditors compiled unaudited information from AFIS, the
Division’s performance measures, staffing-level documents, JLBC
appropriations reports for the Department for fiscal years 2008 and 2009, state
laws, Arizona Administrative Code, the Department’s fiscal year 2007 annual
report, the Department’s Web site, and other agency-provided documents.
 Appendix A—To create Table 6, which lists renewal licensing fees and licensing
periods for nine states and seven facility types, auditors compiled information
from various sources, including other states’ Web sites, statutes, administrative
codes, state-prepared documents, and officials and staff in relevant agencies.
1 Joint Legislative Committee on Performance Evaluation and Expenditure Review: State Agency Fees: FY 2001 Collections
and Potential New Fee Revenues. Jackson, MI: Joint Legislative Committee on Performance Evaluation and Expenditure
Review, Dec. 2002.
2 Auditors selected eight states to compare with Arizona—California, Colorado, Nevada, New Mexico, Oregon, Texas,
Utah, and Washington—based on their geographic and demographic similarity to Arizona.
3 Auditors selected hospitals, psychiatric hospitals, home health agencies, assisted living facilities, nursing homes, and
child care facilities. Auditors chose these facilities to represent the five main division programs.
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
Office of the Director
150 North 18th Avenue, Suite 500 JANET NAPOLITANO, GOVERNOR
Phoenix, Arizona 85007-2670 JANUARY CONTRERAS, ACTING DIRECTOR
(602) 542-1025
(602) 542-1062 FAX
December 31, 2008
Debbie Davenport
Auditor General
2910 N. 44th Street, Suite 410
Phoenix, Arizona 85018
Dear Ms. Davenport,
Thank you for the opportunity to review the report of the performance audit of the Arizona Department of
Health Services (ADHS), Division of Licensing Services, Health Care and Child Care Facility Licensing
Fees, conducted as part of the sunset review process prescribed in Arizona Revised Statutes § 41-2951
et seq.
The findings and recommendations contained in your report have been carefully reviewed by the staff of
ADHS. In accordance with the instructions contained in your letter of December 29, 2008, the attached
response is provided.
ADHS agrees with the Auditor General’s Report regarding the increased workload, both in quantity and
complexity, including a 19 percent increase in the average number of facilities since 2003 and a 158
percent increase in disciplinary actions since 2003. In the past five years, the ability to meet this
workload has suffered, causing delays in the issuance of new licenses for businesses. This has resulted
in child care and health care facility openings to be postponed. Most of the time staff for these facilities
has already been hired, causing businesses to generate a payroll without revenues. Health care and
child care programs are not able to inspect facilities within the licensing period in a timely manner or
investigate all complaints within department guidelines, resulting in potential health and safety issues.
Finally, ADHS has not been able to provide the necessary technical assistance needed to assist facilities
to remain in compliance with the rules, thereby protecting health and safety.
ADHS appreciates the hard work and professionalism exhibited, as well as the insight, provided by your
staff during the audit process. Your staff conducted extensive research regarding licensing fee models
other states have used, and gave the time and effort to learn the very complicated licensing process.
Your work on this audit will be of great value to ADHS and ultimately to the State.
We are working diligently to develop a proposal that is both consistent with the report recommendations,
and that can enable ADHS to better recruit and retain qualified licensing staff to ensure that our mission is
accomplished timely and professionally. Progress on both of these fronts will be key to continuing to
improve ADHS’s work to protect the health and safety of Arizonans.
Sincerely,
January Contreras
Acting Director
Arizona Department of Health Services
Enclosure
Arizona Department of Health Services
Responses to Recommendations of the Auditor General’s Preliminary Draft Report
Division of Licensing, Healthcare and Child Care Facility Licensing Fees
Recommendation 1.1: The Department should develop or adopt a structured approach
to evaluate its current licensing fees for healthcare and child care facilities. As part of its
approach, the Department should develop a cost-based method for calculating fees that
includes all direct and indirect costs. In developing this method, the Department should
do the following:
a. Assess the efficiency of its operations to ensure costs are as low as possible
and document the results of its assessment. The Department should seek to
minimize costs where possible.
b. Develop fees that address factors that influence cost, including licensed
capacity, the time it takes to regulate different facility types, and additional
work resulting from noncompliance with licensing goals.
c. Assesses the adequacy of current systems for tracking direct and indirect cost
data for all of its licensing programs. The Department should enhance or
develop new systems as needed and as resources are available.
d. Consider the effect fee increases may have on different facilities and obtain
their input in proposing new fees. If proposed fees are significantly higher
than current fees, the Department might recommend increasing fees gradually.
Response: The recommendation of the Auditor General is agreed to and the
recommendation will be implemented.
Recommendation 1.2: Once the Department has developed its approach, it should
evaluate its licensing fees for healthcare and child care facilities and propose new fees to
the Legislature that would cover more, if not all, of its regulatory costs.
Response: The recommendation of the Auditor General is agreed to and the
recommendation will be implemented.
Recommendation 1.3: After receiving the Department’s proposal, the Legislature
should consider modifying licensing fees through revising the statutory caps, authorizing
the Department to set fees in rule, or establishing a mechanism in statute for determining
fees.
Response: The recommendation of the Auditor General is agreed to; however, the
Department can only submit a proposal and cannot implement this
recommendation without legislative approval.
Recommendation 1.4: The Department should develop and implement policies and
procedures for using the approach to periodically reassess revenues, costs, and program
outcomes to update fees as needed.
Response: The recommendation of the Auditor General is agreed to and the
recommendation will be implemented.
Performance Audit Division reports issued within the last 24 months
Future Performance Audit Division reports
Arizona Department of Juvenile Corrections—Rehabilitation and Re-entry Programs
Arizona Sports and Tourism Authority
Maricopa County Special Health Care District
07-12 Department of Environmental
Quality—Vehicle Emissions
Inspection Programs
07-13 Arizona Supreme Court,
Administrative Office of the
Courts—Juvenile Treatment
Programs
08-01 Electric Competition
08-02 Arizona’s Universities—
Technology Transfer Programs
08-03 Arizona’s Universities—Capital
Project Financing
08-04 Arizona’s Universities—
Information Technology Security
08-05 Arizona Biomedical Research
Commission
08-06 Board of Podiatry Examiners
07-01 Arizona Board of Fingerprinting
07-02 Arizona Department of Racing
and Arizona Racing Commission
07-03 Arizona Department of
Transportation—Highway
Maintenance
07-04 Arizona Department of
Transportation—Sunset Factors
07-05 Arizona Structural Pest Control
Commission
07-06 Arizona School Facilities Board
07-07 Board of Homeopathic Medical
Examiners
07-08 Arizona State Land Department
07-09 Commission for Postsecondary
Education
07-10 Department of Economic
Security—Division of Child
Support Enforcement
07-11 Arizona Supreme Court,
Administrative Office of the
Courts—Juvenile Detention
Centers